Response to the Report of the International Financial ... · financial and economic information to markets and the public at large. • The development of new mechanisms for strengthening

Response to the Report of theInternational Financial Institution AdvisoryCommission

This response to the Report of the International Financial Institution Advisory Commission (theCommission) has been prepared pursuant to section 603(i)(1) of the Foreign Operations, ExportFinancing, and Related Programs Appropriations Act, 1999, found in Public Law 105-277.Section 603(i)(1) provides that the Secretary of the Treasury shall, within three months of receiptof the Commission report, “report to the appropriate committees on the desirability andfeasibility of implementing the recommendations contained in the report [of the Commission]”.

The Commission was established under the legislation authorizing U.S. participation in the mostrecent quota increase of the International Monetary Fund (IMF) and the establishment of theNew Arrangements to Borrow. Congress mandated the Commission to report on the future roleand responsibilities of international institutions including the IMF, World Bank, the African,Asian and Inter-American Development Banks, the European Bank for Reconstruction andDevelopment, the Bank for International Settlements and the World Trade Organization. InMarch 2000, the Commission released its report, including a set of recommendations supportedby the majority, and three dissenting statements.

The work of the Commission took place in the context of intense public discussion on the role ofthe international financial institutions (IFIs). A number of reports with alternative programs forreform have been published recently by the Council on Foreign Relations, the CATO Institute,the Carnegie Endowment for International Peace, and the Overseas Development Council,among others. The Commission’s recommendations are appropriately considered against thebackground of these reform proposals, the range of Congressional mandates for IFI reform, andrecent U.S. and multilateral efforts to reform the international financial architecture.

June 8, 2000

Table of ContentsIntroduction 1Principal Conclusions 2-8U.S. Reform Agenda in the IMF and the MDBs 9-16Response to the Recommendations on Reform of the IMF 17-26Response to the Recommendations on Reform of the MDBs 27-38Debt Reduction for the Heavily Indebted Poor Countries 39-41Response to the Recommendations on Reform of the BIS 42Response to the Recommendations on Reform of the WTO 43Response to the Statement by Commissioner Levinson 44-45Appendix A.1-A.3

U.S. Department of the Treasury Response to the IFI Advisory CommissionPrincipal Conclusions – Page 2

Principal Conclusions

The IFIs are among the most effective and cost-efficient means available to advance U.S. policypriorities worldwide. Since their inception, they have been central to addressing the majoreconomic and development challenges of our time. They have promoted growth, stability, openmarkets and democratic institutions, resulting in more exports and jobs in the United States,while advancing our fundamental values throughout the world.

The Commission affirms the importance of the IFIs in today's more integrated world. We sharethis conviction and many of the underlying objectives of the Commission’s report. We alsoshare with the Commission the belief that the IFIs need to reform in important ways to confrontthe new challenges of today’s global economy. The Administration, working closely with theCongress, has pressed for and achieved significant changes in the institutions. And more needsto be done. The second part of our response details reform achievements to date, and our agendafor further change.

At the same time, and despite our shared objectives, it is fair to say that we disagree infundamental respects with the bulk of the Commission’s reform prescriptions. After carefulconsideration of each of the recommendations in the report, we believe that, taken together, therecommendations of the majority, if implemented, would profoundly undermine the capacity ofthe IMF and the multilateral development banks (MDBs) to perform their core functions ofresponding effectively to financial crises and promoting durable growth and market-orientedreforms in developing countries – and would thus weaken the IFIs’ capacity to promote centralU.S. interests.

Shared Objectives

The Commission recognizes a continuing and essential role for the IFIs.

The majority report concludes appropriately that the IMF should continue to have an importantrole in crisis prevention, and that a strong capacity to respond to financial crises will be crucial tothe global economy going forward.

The majority report also concludes that the MDBs have a critically important mission inpromoting long-term development and reform in the developing countries, and that moreresources need to be made available to support these efforts in the poorest countries.

These are welcome conclusions, which the Administration shares.


The Commission also outlines a number of reform objectives that have commanded broadbipartisan support in recent years – objectives that have formed the basis for achievingsubstantial change in the nature and focus of these institutions. These objectives include:

• A sea change in the transparency of these institutions’ operations and that of membercountries.

As a result of consistent U.S. pressure, the IMF and the MDBs now systematicallydisclose to the public a broad range of key documents on their lending operations– including Letters of Intent and Press Information Notices. For example,program documents for nearly 90 percent of the IMF arrangements discussed bythe IMF Executive Board since June 1999 have been publicly released. And thecreation and expansion of the Special Data Dissemination Standard (SDDS) haveset a new benchmark for IMF members to meet in providing accurate and timelyfinancial and economic information to markets and the public at large.

• The development of new mechanisms for strengthening incentives for countries to reducetheir vulnerability to crises.

The U.S. has strongly promoted a more comprehensive international effort toreduce the risk of financial crises, especially in the wake of recent crises in Asiaand elsewhere: this has borne fruit in the development of a common set of bestpractices and financial standards; a systematically greater focus within the IFIson national financial vulnerabilities, including excessive leverage orunsustainable exchange rate regimes; and the development of the IMF’s newContingent Credit Line (CCL), conditioned on strong, ex-ante reforms in theseand other key areas.

• A new focus within the IFIs on the importance of strong, open financial systems, better debtmanagement policies, and appropriate exchange rate regimes.

Because national policy failures in these areas have played a significant role inrecent crises, the IMF and the World Bank have now adopted, or are in theprocess of adopting, a number of new initiatives to help improve the quality of thepolicy advice that they provide to governments, to help them design strongerfinancial systems, debt structures that are less vulnerable to various risks, andmore resilient exchange rate regimes.

• Fundamental reform of the framework for the provision of IMF and World Bank lending tothe poorest countries, centered on greater selectivity and with a greater focus on povertyreduction and growth.

Consistent pressure from the Administration and from Congress has helped toachieve much greater selectivity in the allocation of MDB assistance – withgreater support for stronger performance and reduced support for repeated non-performance. We have also helped to refocus the IFIs’ attention on key prioritiessuch as investment in basic education and health care and combating corruption.The IMF’s new Poverty Reduction and Growth Facility (PRGF) puts core socialinvestments and poverty reduction at the heart of the country’s economicprogram. And the World Bank has developed a range of tools to address


corruption more effectively: for example, in the technical assistance it hasprovided for civil service reform.

We have been working to build consensus in Congress and among other IFI shareholders on theimportance of other broad objectives that are also highlighted in the Commission Report. Mostnotably:

• A substantial increase in debt relief and concessional financial assistance targeted to thepoorest developing countries.

The new international debt initiative launched in 1999 will grant substantial debtreduction to a number of highly indebted poor developing countries that committo a credible program of economic reform. Five countries have already qualifiedfor this enhanced relief, worth a total of $13-14 billion, but the United States mustplay its part to ensure that the initiative is adequately funded. In addition to itsfinancing request for this initiative, the Administration has proposed targetedincreases in development assistance to combat infectious diseases, includingHIV/AIDS, and to promote primary education, poverty reduction and otherobjectives, to complement existing bilateral and multilateral assistance programs.

• A stronger role for the MDBs in international efforts to provide global public goods.The World Bank, with our encouragement, is intensifying its support forinternational efforts to promote environmental sustainability, reduce threats tobiodiversity, combat infectious diseases, and encourage the adoption ofdevelopment best practices. As part of this effort the President has called for theMDBs to dedicate a further $400 million to $900 million of their lending to thepoorest countries each year for basic health care to immunize, prevent and treatinfectious diseases.

• And the need for a clearer delineation of the respective roles of the multilateral developmentbanks and the IMF.

We are working to develop a more focussed role for the IMF, centered on crisisprevention and response in the emerging economies and macroeconomic stabilityin the poorest economies, and for the MDBs, which should address the longer-term challenges to development and reform in the developing and emergingeconomies.

The reforms that have been implemented in the international financial institutions and theimportant further steps that are underway will make a significant contribution to the IFIs’capacity to address the diverse and complex array of risks and challenges that the globaleconomy now presents. Many of these reforms have been initiated by the United States, andthey largely reflect the directions that the Congress outlined in the legislation establishing theCommission. But America’s ability to promote further change in the future will depend centrallyon our capacity to build broader support for our proposals among the shareholders of theinstitutions.


Commission Recommendations

Despite the broad objectives that we have in common, we find ourselves in fundamentaldisagreement with the Report’s core recommendations for further reform.

The critical test in evaluating the desirability of alternative reform proposals should be anassessment of whether they would strengthen or weaken the capacity of the institutions toaddress economic challenges that are critical to U.S. interests. In our view, the corerecommendations of the majority, taken together, would substantially harm the economic andbroader national strategic interests of the United States, by reducing dramatically the capacity ofthe IMF and the MDBs to respond to financial crises, and by depriving them of effectiveinstruments to promote international financial stability and market-oriented economic reform anddevelopment.

The reforms proposed by the majority do not offer a realistic prospect of preventing futurefinancial crises and, by effectively terminating the lending programs of the IMF and the MDBsin a broad range of emerging market economies, could significantly undermine our capacity topromote changes that would reduce the vulnerability of these economies, and as a consequencethe vulnerability of the U.S. economy, to future financial crises.

Specifically, if the Commission’s majority reform proposals had been in place in 1997 and 1998,neither the IMF nor the World Bank would have been able to respond to the acute financial crisisthat spread across emerging markets during that period. As a result, the crisis would have beendeeper and more protracted, with more devastating impact on the affected economies andpotentially much more severe consequences for U.S. farmers, workers, and businesses.

By essentially taking the World Bank out of the development finance business, theCommission’s reforms would eliminate the most cost-efficient and effective of the internationaldevelopment institutions, and the one with the greatest concentration of development experienceand expertise. The result would be to impose a much greater burden on bilateral resources tomeet development objectives that are so important to the U.S. interest. This would also reducethe effectiveness of development assistance provided by the United States and other nations.

The reform proposals of the majority, had they been in place at the start of the 1990s, also wouldhave precluded the MDBs from supporting economic restructuring and private sectordevelopment in Eastern Europe and the former Soviet Union, and across Asia and Latin Americain a period of historic opportunities for positive reform. The MDBs would have been unable topromote financial sector reform and capital market development in the emerging marketeconomies that now have the bulk of the world’s population and a substantial share of worldoutput. And there would have been significantly reduced support for trade liberalization,privatization, agricultural reform, and other steps that have provided significant economicbenefits for many of the largest, most important emerging economies that have also been rapidlygrowing trading partners of the United States.

In a world where the fortunes of U.S. workers and farmers, business and financial institutions areincreasingly tied to the overall strength of the world economy, we have a compelling interest inworking to build stronger, more effective global institutions that are able to address new


challenges to growth and financial stability. In short, by weakening the institutions, we believethat the recommendations of the Commission would leave the United States and many of ourclosest allies and economic partners more vulnerable to the risks that a more integrated worldpresents.

Commission Recommendations for the International Monetary FundThe majority report outlines a set of recommendations for reform of the IMF thatwould fundamentally change the nature of the institution. The main objective ofthe Commission’s proposals is to limit IMF lending to very short-term, essentiallyunconditional liquidity support for a limited number of relatively strong emergingmarket economies that would pre-qualify for IMF assistance.

We do not believe this approach is either desirable or feasible.

• By restricting the IMF’s capacity to lend only to emerging market countries that pre-qualifyfor assistance, the Commission’s recommendations would preclude the IMF from being ableto respond to financial emergencies in a potentially large number of its member countries.

– Even with a long phase-in period, many countries of potentially systemic importance toglobal financial stability could be deemed ineligible for assistance, depriving us of thecapacity to help contain and resolve crises through the IMF. The majority acknowledgesin the executive summary of the report a possible need for an exception to theprequalification requirements “where the crisis poses a threat to the global economy”, butthis proposal is inconsistent with the overall thrust of the report and is not discussed ordeveloped in the report itself.

– The Commission’s limited criteria for prequalification, by focusing on the financialsector, might not significantly reduce countries’ vulnerability to financial crisis, evenwhere they have met all the relevant conditions. Experience suggests that theseconditions would not prevent governments from making a wide range of policy mistakesthat could contribute to a financial crisis, nor would they significantly insulate countriesfrom crises that arise outside the financial sector.

• By precluding the IMF from applying policy conditions to its loans, outside of a very limitedset of prior conditions related to financial sector soundness, disclosure, and a generalrequirement for fiscal soundness, the majority proposals would deprive the IMF of thecapacity to promote the policy reforms that are likely to be fundamental to restoringconfidence and economic recovery in such cases. The result would be to increasesubstantially the risk that the financial assistance provided would be ineffective.

• By limiting IMF assistance to very short-term loans (four to eight-month maturity) at veryhigh interest rates, the majority proposals would render IMF assistance ineffective inpromoting recovery even in those countries that prequalified. Experience suggests that theseterms would force repayment prematurely. Even in the most successful cases of recovery, ithas taken longer than eight months to restore substantial access to private finance. Prematurerepayment and high interest rates that undermine the financial position of the governmentwould in turn undermine confidence among domestic and foreign investors, and couldthereby prolong and exacerbate the crisis itself.


• For all of these reasons we believe that implementing these proposals would substantiallyreduce the IMF’s capacity to restore lasting financial stability in crisis economies. However,to the extent that such a system would commit the IMF to providing very large-scaleassistance, with very limited conditions, it would also risk a substantial increase in moralhazard in the international financial system. Investors would be encouraged before a crisis tolend excessively to prequalified countries in the expectation of being repaid from IMFassistance. And governments would have an incentive to take risks in policy areas notconstrained by the eligibility criteria, in the expectation they would be insulated by the IMFfrom the costs of failure. The result, in many ways, would be the worst of all worlds: over-confidence in a system that would prove ineffective for preventing and responding to crises.

• By eliminating the IMF’s concessional lending capacity in the poorest developing countries,the majority proposals would undermine the capacity of the IFIs to promote in thesecountries the types of macroeconomic policy reforms that are critical to economic growthand long-term development, and would thereby undercut the effectiveness of substantialamounts of bilateral and multilateral development assistance.

While we have serious reservations about the wholesale adoption of prequalification for IMFprograms that the Commission proposes, we would note, once again, that we share theCommission’s desire to find new ways to encourage countries to reduce their vulnerabilitybefore crisis strikes. In this context, we agree with the report that it is critical for countries tostrengthen the financial sector, improve the quality of disclosure, and reinforce the resilience ofthe exchange rate regime. With the objective of trying to design more powerful incentives forpolicy changes before crisis strikes, and with our active encouragement, the IMF has establisheda new facility, the CCL, that would be available to countries that met a range of conditions. Weare now in the process of identifying modifications to this facility to try to make it moreeffective. We believe this is a promising direction for reform going forward as a complement tothe IMF’s core lending instruments.

Commission Recommendations for the Multilateral Development BanksThe Commission proposes a comprehensive set of changes for the multilateraldevelopment banks that would substantially modify the way they provide financialassistance in support of development. The majority proposals would essentiallyforeclose MDB lending to a broad range of emerging market economies, focus theefforts of the MDBs on grants and “institutional reform loans” for the poorestdeveloping countries, transfer the World Bank’s lending role to the regionaldevelopment banks, and close down the private sector financial operations of theinstitutions.

We do not believe this approach is either desirable or feasible.

• By eliminating MDB assistance for countries with a per capita income above $4,000 or aninvestment grade credit rating, the majority proposals would eliminate the capacity of theseinstitutions to promote economic reform and development in countries that account for asubstantial share of the world’s population and continue to face formidable developmentchallenges. Because access to private capital for many of these countries is fragile andextremely limited, denying these countries access to multilateral lending would directly


reduce their potential resources for meeting crucial development needs. Graduation policiesdesigned with a fixed and excessively low threshold risk worsening economic outcomes inthese countries, and increase the likelihood of future crises. This could undercut or prolongthe path to sustainable market access, and ultimately delay the time when these governmentswill grow out of the need for official support.

• By eliminating the private sector financial operations of the MDBs (including closing theIFC and MIGA), the majority proposals would eliminate an important part of the MDBs’capacity to promote private enterprise, privatization of state-owned firms, and thedevelopment of domestic capital markets, all of which are critical to successful developmentstrategies.

• By eliminating the World Bank’s financial role in providing development assistance and bytransferring financial capacity to the Inter-American, Asian and, over time, the AfricanDevelopment Banks, we believe the majority proposals would undermine the effectiveness ofthe overall development effort. It would be counterproductive to limit to an advisorycapacity the institution that is the strongest, most experienced, and most competent in theMDB system, and has the most advanced agenda for implementing reforms supported by theU.S. Congress over the decades. Although the regional development banks have manystrengths and in many cases play a useful complementary role to the World Bank, they do nothave the capacity to match the strengths of the World Bank in most areas of developmentpolicy. Nor do we believe that they should seek to do so, at a time when there is broadagreement on focusing the missions of such institutions where they have comparativeadvantage.

• By eliminating the capacity of the MDBs to provide emergency lending at times of financialcrisis, the majority proposals would make crisis response by the IMF less effective. In thoseexceptional circumstances where crisis lending is appropriate, the emergency lendingcapacity of the MDBs can be essential to support an appropriate level of fiscal expendituresin such a crisis, to design and finance financial sector restructuring programs, and to furthertargeted assistance for critical social programs, such as education and healthcare.

• By transforming the adjustment and project finance capacity of the institutions into a systemof grants largely channeled directly to service providers, bypassing governments, and with anew financial instrument for institutional reforms, the majority recommendations embrace anumber of desirable objectives without identifying proposals that have a realistic prospect ofimproving the overall effectiveness of development assistance. If implemented as proposed,these measures would limit the overall availability of financial assistance to the poorest byeliminating the financial leverage provided by the MDBs’ hard-loan operations and theresources generated from reflows on concessional loans. Instead, the recommendationsemphasize a financing instrument that is unlikely to be effective or attractive to borrowerscompared to existing instruments for promoting critical improvements in the policyframework and overall institutions of government.

As noted above, we share the Commission’s view on the importance of focusing assistance onthe countries that need it most, and agree that substantial further reforms are necessary tooperationalize fully in the MDBs the lessons of recent experience with regard to the design andfinancing of more effective development strategies. We will continue to explore a broad rangeof proposals for how to best achieve these objectives. Our reform agenda is discussed in moredetail in the next section. A detailed response to the Commission’s recommendations follows.

U.S. Department of the Treasury Response to the IFI Advisory CommissionU.S. Reform Agenda in the IMF and the MDBs – Page 9

U.S. Reform Agenda in the IMF and the Multilateral Development Banks

The Administration has worked to bring about substantial reforms in the international financialinstitutions over the past several years. These efforts have been framed to a significant degree bythe objectives set out in U.S. legislation, including the 1998 legislation authorizing U.S.participation in increasing the IMF’s financial resources. The most recent Congressional effortsto advance reform in the IMF and the MDBs focused on improving transparency andaccountability across the institutions; changing the terms of IMF assistance to reduce the risk ofmoral hazard; refocusing the policy conditionality to promote market oriented reform,environmental sustainability, and mitigating the social impact of economic change; andencouraging greater selectivity in providing development finance. Some examples of recentprogress in these areas and others are detailed in the boxes that follow at the end of this part.

Although these changes are highly significant, we do not believe they sufficiently address ourconcerns about the capacity of the institutions to confront effectively the new and complexchallenges of the world economy. Further reform is needed – on many fronts over a period ofseveral years.

To this end, the Administration has outlined a broad framework for additional reforms that webelieve should guide the evolution of the institutions in the years ahead. Many of these changesare founded on objectives similar to those that motivated the Commission’s recommendations.In general, however, we believe that we have identified a more promising set of reforms, thatmatch more closely our interests as a nation, have more practical value in addressing thecomplexity of these problems, and are more likely to gain the broad international supportnecessary to any successful program of change in international institutions.

The policy issues involved in designing more effective ways to promote financial stability andsuccessful economic development are many and complicated. The Congress and theAdministration share an interest in preserving the ability to adapt our approach to reflect pastexperience and the evolution of informed opinion. And because of the high stakes involved inmaking the right decisions about the appropriate direction of the institutions, we need to have asubstantial degree of confidence that the reforms we pursue will demonstrably improve and notimpair the effectiveness of the institutions. These considerations have shaped the approach forreform outlined by the Administration.

Over the past several months we have begun to build consensus for these changes. We havefound considerable support for the broad direction of our proposals, and have already seen someconcrete changes in the institutions. This part of the report outlines the Administration’sproposals for reform, identifies specific measures that we believe would be most effective inoperationalizing these changes, and briefly reviews recent changes in the institutions resultingfrom our initiatives.


Agenda for Further Reform of the International Monetary Fund

The central objective of reform in the IMF in this world of more integrated global capitalmarkets should be to reduce the incidence and severity of financial crises, particularly inemerging market economies, and, more broadly, to foster growth in the context of a more stableinternational financial system, including strong macroeconomic policies to spur growth in thepoorest countries. We believe the most promising proposals for advancing these objectives lie inthe following areas:

Greater focus on promoting the flow of information from governments to markets and investors

IMF surveillance should shift from a focus on collecting and sharing information within the clubof nations to promoting the collection and dissemination of information for investors and thepublic, and assigning high priority not only to the quantity but also to the quality of informationdisseminated.

• To reinforce the Special Data Dissemination Standard as the international standard fordisclosure of national economic data, we support a new quarterly publication highlightingcountry adherence and compliance with the SDDS, and encouraging more countries tosubscribe and comply.

• The SDDS should be further strengthened with better data on countries’ external debt and, indue course, financial sector indicators.

• Publication of IMF Reports on the Observance of Standards and Codes (ROSCs) on countryobservance of the range of codes and standards to help strengthen financial systems shouldbe routine, with countries allowed to disclose their IMF Financial Sector Assessments if theychoose.

Greater attention to financial vulnerabilities and steps to reduce countries’ vulnerability to crisis

This would entail, in particular, greater focus on the strength of national balance sheet andliquidity indicators, with a more fully integrated assessment incorporated into regular IMFsurveillance. In this context, the IMF should highlight more clearly the risks of unsustainableexchange rate regimes.

• Indicators of financial vulnerability, liquidity and balance sheet risks should be developedand systematically incorporated into the Fund surveillance process, both bilateral andmultilateral, and published regularly.

• Debt management guidelines, based on the recent work by the IMF, the World Bank and theFinancial Stability Forum, should be developed by the IMF to guide countries to limit theirrisks, make best use of today’s markets, and disclose their debt and reserve managementpolicies.


A more strategic financing role focused on crisis prevention and emergency situations inemerging economies, and on supporting macroeconomic stability and growth in the poorestcountries

The IMF has already begun to streamline its financing instruments and a major review of itsfacilities is underway, as called for by the United States and the G-7 countries earlier this year.Going forward, we believe the IMF should focus primarily on forestalling contagion andproviding appropriately priced and conditioned financing for balance of payments emergenciesin emerging market economies, and on providing the macroeconomic framework for growth andfinancial stability in the poorest, in the context of World Bank-led poverty reduction programs.

• The IMF’s CCL should be recast to make it a more effective crisis prevention tool, withgreater clarity about the conditions for its use and a more attractive pricing structure relativeto the IMF’s other crisis financing instruments.

• Terms of non-concessional IMF loans should be changed, with graduated charges to promoteearly repayments, to limit excessive use of large-scale IMF financing and to reduce undulyprolonged reliance on IMF financing. Use of the Fund’s Extended Financing Facility (EFF)to address longer-term structural balance of payments problems should be limited.

• The new Poverty Reduction and Growth Facility should provide IMF advice and financingfor the poorest in support of strong macroeconomic policies to combat capital flight andpromote the financial stability and growth needed for effective poverty reduction.

Greater emphasis on catalyzing market-based solutions to crises

The IMF should continue to develop ways of catalyzing market-based approaches to resolvingcrises, particularly where the private sector is involved, with carefully designed approaches toachieve the right balance between maximizing prospects for an early recovery from the crisesand the need to lessen the risk of moral hazard.

• IMF lending should catalyze private market financing on appropriate terms and promote areturn to normal market access.

• In cases where debt restructuring is needed, the Fund should provide a medium-termframework for the debt negotiation.

• The Fund should be prepared to lend into arrears if a country is seeking to workcooperatively and in good faith with its private creditors and is meeting other programrequirements.


Modernizing the IMF

As the IMF adapts to changes in the international financial system, it is important that it alsomodernize as an institution, improving its evaluation system, enhancing dialogue with the privatesector, and updating its existing governance structure.• The IMF should quickly establish the recently agreed upon permanent independent

evaluation office, ensuring that the office’s structure, terms of reference and operatingprocedures allow it to be fully independent, transparent and open to external consultations.

• The Fund should formally establish a liaison group consisting of private financial marketparticipants to deepen the Fund’s understanding of global market trends.

• Changes in the international monetary system, including countries’ relative economic andfinancial strength, should be more fully reflected in the IMF’s governance structure.

Agenda for Further Reform of the Multilateral Development Banks

The overriding objective of reform of the multilateral development banks in a world where thehumanitarian and economic challenges facing developing and emerging economies are stillformidable should be to put into place more effective ways of promoting poverty reduction,market-oriented economic reform, increased resources in support of programs with highdevelopment returns, such as health care and basic education, the successful graduation ofemerging and transition economies to the point where they can rely on private finance, andglobal public goods, such as environmental sustainability and programs to combat infectiousdiseases. We believe the most promising proposals for advancing these objectives lie in thefollowing areas:

Improved performance and impact

The MDBs should rely on a smaller number of clear and measurable performance targets that areset more realistically and are more vigorously adhered to.

• Performance-based lending guidelines should apply to all soft loan windows and assistanceshould be more focused on countries that are performing well, with less assistance to poorperformers -- and essentially withheld where governance is especially weak.

• More effective mechanisms are needed within a number of the MDBs to evaluate whentargets and intermediate benchmarks have been met, along with a stronger commitment todisburse in stages and to review more frequently.


Emphasis on economic growth and poverty reduction

The MDBs need to focus an even higher level of assistance in areas that have the highestdevelopment returns, and particularly on investments in access to health care, clean water, andbasic education.

• Ex-ante social and poverty assessments done by the World Bank should be prerequisites toall Country Assistance Strategies (CASs) and adjustment operations, and such assessmentsshould be more explicitly linked to the sequencing and pace of reforms in IMF PRGFprograms.

• Public Expenditure Reviews should be precursors to CASs to identify and remedy poorcomposition and efficiency of spending.

• Lending to social sectors and other poverty reduction priorities should be further increased.

Focused lending to emerging economies

We believe that the MDBs need to explore more innovative ways to catalyze private capitalflows to countries, within strict and clear guidelines that safeguard the financial position of theinstitutions.

• MDBs should establish a more selective lending framework that facilitates graduation.

• MDB lending should decline in volume over time in countries that are expanding theircapacity to attract private finance.

• Capital increases for the MDB hard windows are not anticipated and future donorcontributions should be directed exclusively to the soft windows. Along these lines, theMDBs should re-examine their current hard window pricing policies with a view towardstronger sustainability of the institutions’ balance sheets and building a greater financialcapacity to contribute to overall development efforts.

Transparency

There needs to be a higher degree of transparency, with a stronger presumption for publication ofkey loan documents, and transparency in the relevant operations at the national level, so that thedomestic population, outside investors and donors can more easily track results.

• All CASs and Poverty Reduction Strategy Papers (PRSPs) should be released to the public.

• All reports of MDB evaluation units should be public.

• The quality and comprehensiveness of public participation in review of Bank policies,projects, CASs and PRSPs should be strengthened.


Global public goods

As integration proceeds, the world is confronting a broad range of problems that crossinternational borders and defy solution by individual governments and markets. The WorldBank and other development institutions have an enormous contribution to make in helpingadvance international efforts to provide global solutions in the form of public goods, especiallythose which benefit developing countries.

• There should be even greater focus on solutions to the problems of infectious diseases anddegradation of the global environment.

• Information technology can be used better to create and disseminate medical knowledge andglobal environmental expertise.

Improved collaboration and selectivity

Institutional collaboration and definition of tasks need to be further improved, not only betweenthe IMF and the World Bank, but also between the World Bank and the regional developmentbanks.

• MDBs should reduce MDB overlap and inconsistencies, speak more clearly on priorities, andshare lessons of experience.

• Regional development banks should follow the example of the World Bank/AfricanDevelopment Bank Memorandum of Understanding (MOU) to develop agreements betweeneach of the remaining regional banks and the World Bank.

• MDBs should work to reduce the administrative burden on developing countries that stemsfrom negotiating multiple development and economic priorities with multiple donors andinternational institutions.


International Monetary Fund: Selected Reforms Achieved to DateTransparencyand Account-ability

• Since June 1999, there has been a presumption of public release of program documentsdetailing policy commitments countries have agreed to as a condition for IMF support;documents have been released in 50 of 58 cases since then.

• Release of “Public Information Notices” (PINs) following Executive Board discussions ofArticle IV consultations is becoming routine: 113 of 139 (81%) were released in 1999. PINsare also published on a broad range of policy issues, e.g., private sector involvement,safeguarding IMF resources, IMF work program.

• There is agreement to publish the IMF’s Financial Transactions Plan quarterly with a one-quarter lag beginning in August 2000. Information about the IMF’s financial position isavailable on the IMF’s internet web site.

CrisisPreventionandResolution

• The SDDS is now fully operational, providing potential investors with better information aboutfinancial conditions in member countries; 24 countries now comply with SDDS.

• The IMF is moving to address vulnerabilities, including national balance sheet and liquidityrisks, as part of surveillance. A growing number of Article IV staff reports make use of keyvulnerability indicators.

• The CCL offers incentives for countries to take early steps to reduce vulnerability to crisis.The Supplementary Reserve Facility (SRF) charges premium interest rates to encourage anearly return to private markets, while providing exceptional financing to countries of systemicimportance.

• The IMF has begun to make use of guidelines developed by the G-7 to catalyze private sectorinvolvement.

StrengthenedFinancialSystems

• The IMF helps to disseminate and encourage implementation of the Basle Core Principles.• Under the Financial Sector Assessment Program (FSAP) launched in 1999, the IMF and World

Bank jointly conduct in-depth assessments of countries’ financial systems; five countries haveundergone assessments with seven more to be completed by July 2000.

• As of September 30, 1999, the IMF had completed assessments (ROSCs) of countries’adherence to internationally-accepted standards for 13 countries, 10 of which agreed topublication. Twenty-four countries are participating in a third phase to be completed inSeptember 2000. Information on ROSCs is available on the IMF web site.

ExchangeRate Regimes

• The United States and other G-7 nations have agreed that the IMF, in its surveillance, shouldincrease attention to exchange rate sustainability.

• The G-7 have agreed that the IMF should not provide significant official financing to a countrywhose government is intervening heavily to support a particular exchange rate level, exceptwhere that level is judged sustainable and certain conditions have been met, includingsupporting institutional arrangements and maintaining consistent domestic policies.

Labor Issues • Labor standards issues have been raised in recent important IMF programs (e.g., Korea,Indonesia, Brazil and Mexico), as well as in Article IV consultations and program reviews(e.g., Indonesia, Thailand and Korea).

• The ILO has been granted ongoing observer status in the IMF’s International Monetary andFinancial Committee.

• The IMF, with the World Bank and the AFL-CIO, sponsored a seminar on Labor Standards andthe New International Economy during the 1999 Annual Meetings of the IMF and World Bank.

TradeLiberalization

• In 1998, 24 IMF members moved to a more open trade regime, 17 in the context of Fund-supported programs.

• In 1999-2000, trade liberalization was an element in IMF programs in Indonesia, Nigeria,Zambia, Guyana, South Korea, Jordan, Colombia and Uganda.

Good • A new safeguards framework to guard against misuse of IMF resources requires the publication
GovernanceandCombatingCorruption
of annual audited central bank financial statements and new assessments of internal controls.• The IMF now routinely encourages countries to maintain strong internal financial controls and

tighten supervision and regulation of domestic financial institutions, including measures todeter money laundering.

• Governance/corruption measures were an integral part of Fund programs in the Ivory Coast,Indonesia, Ukraine, Russia, Uganda and Kenya.


Multilateral Development Banks – Selected Reforms Achieved to DateTransparencyand Account-ability

• The MDBs now have formal disclosure policies based on a presumption of disclosure.• MDB CASs increasingly address fiscal transparency and sound budget choices, including

military spending, and public expenditure reviews are conducted prior to many adjustmentloans and CASs.

• Most MDBs have installed independent inspection panels to investigate public allegations ofnon-compliance with MDB policies. Compliance advisers have been established in the IFCand MIGA to address public complaints.

• Public participation in the design of MDB policies, projects and country strategies hasincreased significantly. Public participation in the design of PRSPs is mandatory.

PovertyReduction

• Heavily Indebted Poor Country debt reduction is a major new component of the internationalresponse to poverty reduction, under which PRSPs are being used to direct resources freedfrom debt relief to social investments.

• Comprehensive poverty assessments done by the World Bank have started to feed into thedesign of macroeconomic and structural reforms in lending programs for the poorest countries.

• World Bank lending is shifting from traditional infrastructure projects toward institutional andpolicy reforms designed to build an enabling environment for human development and privatesector development

Effective,Selective andPerformance-BasedLending

• Lending effectiveness and project quality are enhanced through: annual assessments byevaluation units in each MDB; the introduction of mandatory project performance andmonitoring indicators; and the addition of outcome indicators in CASs.

• Selectivity and comparative advantage have been encouraged through the adoption of an MOUbetween the World Bank and AfDB, and the creation of the Evaluation Cooperation Group –composed of the heads of evaluation units of each of the MDBs – to establish a commonproject rating methodology to facilitate identification of MDB comparative advantage.

• The World Bank and the AfDB have policies to link concessional lending levels to countryperformance by evaluating public sector performance/governance, macro and structuralpolicies, and poverty reduction strategies. Good IDA performers now receive five times theallocation of poor performers.

Governanceand Anti-corruption

• Comprehensive governance strategies covering accountability, transparency, corruption,participation and legal/judicial frameworks are in place or under preparation in every MDB.

• The World Bank now prepares governance assessments for all countries; in cases whereindicators suggest severe governance problems, lending is reduced or suspended.

• MDBs have upgraded attention to fiduciary policies, including anti-corruption measures andimproved procurement guidelines to safeguard the use of Bank resources.

Labor andEnvironment

• An increasing number of MDB lending facilities include safeguards for core labor standards.Additionally, MDB planning instruments and guidelines increasingly include references and/orprovisions for key labor issues and core labor practices.

• Publicly available Environmental Impact Assessments are required for all investment projectsand sector adjustment loans with potentially significant environmental consequences.

• There is now a much greater focus on environmental sustainability in MDB projects.StructuralChange forMoreResilientFinancialSystems

• In response to the onset of crisis in East Asia, the World Bank established a unit of financialexperts to provide comprehensive, rapid-response, financial-sector advice to affected countries.

• Under the FSAP, the World Bank and IMF jointly carry out assessments of selected countries'vulnerabilities

• The World Bank and IMF have been developing jointly debt management guidelines to informcountries on how to limit risks associated with sovereign debt and make best use of today'smarkets.

Trade • MDBs have committed to better integrate trade into CASs in order to improve trade-related
infrastructure and institutions, and to foster trade liberalization and participation in theinternational trading system.

U.S. Department of the Treasury Response to the IFI Advisory CommissionResponse to the Recommendations on Reform of the IMF – Page 17

Response to the Recommendations on Reform of theInternational Monetary Fund

Restrict IMF lending to countries that meet prequalification criteriaThe Commission recommends that the IMF be restructured as a smallerinstitution (a “quasi-lender of last resort”) that focuses on providing short-termliquidity assistance to solvent emerging economies meeting a set ofprequalification eligibility criteria.

We share a number of the objectives that apparently underlie this recommendation – notably theimportance of creating strong, open financial systems; the role that greater transparency andmarket forces can play in strengthening financial systems and reducing their vulnerability tocrisis; and the importance of sharpening incentives for countries to rely on private capitalmarkets and avoid undue recourse to IMF financing. However, we believe that thisrecommendation would be neither desirable nor feasible.

To be eligible for IMF financing, a member country would have to meet three conditionsprimarily: (1) permit freedom of entry and operation for foreign financial institutions; (2)establish market-based disciplines in the domestic financial sector and ensure that commercialbanks are adequately capitalized (e.g., by a significant equity capital base or by the issuance ofuninsured subordinated debt to non-governmental and unaffiliated entities); and (3) publishregularly the maturity structure of its outstanding sovereign and guaranteed debt and off-balance-sheet liabilities in a timely manner. The Commission notes that this system would be phased inover a period of several years and refers to the possibility of lending to countries that do notprequalify in circumstances where a crisis poses a threat to the global economy. This exceptionis not discussed in the report.

Our concern with the proposal centers on three points. First, implementing this recommendationwould preclude the IMF from being able to respond to financial emergencies and supportrecovery in the vast majority of its members, possibly including all of the emerging marketcountries affected by the financial crisis of 1997 and 1998. The exclusive focus on relativelystrong emerging economies would leave out most of the Fund’s membership, notably all lowerincome countries and many transition economies.

Second, the proposed eligibility criteria are too narrow. Even where they were met, they wouldbe unlikely to protect economies from the broad range of potential causes of crisis. The criteriafocus on the financial sector, and yet even problems that surface in the financial sector oftenhave their roots in deeper economic and structural weaknesses. One simply cannot predict withconfidence what the next generation of crisis will be and therefore we need to preserve the IMF’sability to respond flexibly to changing circumstances.


Third, the eligibility criteria as designed could increase moral hazard risks in the system. TheCommission’s approach would provide an assurance of substantial financing, availableimmediately and automatically without conditions, to countries that have met the eligibilitycriteria but may still have fundamental macroeconomic weaknesses or structural problems inareas other than the financial sector. In our view, this approach risks creating incentives forcountries to maintain inappropriate policies (other than those directly covered by the eligibilitycriteria) in the expectation that unconditional funds would protect them from the adverseconsequences of their actions or inaction – as well as incentives for investors to lend to countrieswith substantial underlying vulnerabilities in the expectation that the IMF will bail them out.

Despite our concerns with this proposal, we think it is important to strengthen incentives forcountries to take early steps to reduce their vulnerability to crisis. This should include steps tostrengthen macroeconomic frameworks; address macro-related structural weaknesses (includingthough not limited to the financial sector), adhere to relevant international standards and codes,and increase transparency. It was in large part with these objectives in mind that the IMF createdthe Contingent Credit Line (CCL) in April 1999. The CCL offers the possibility of substantialfinancing to countries fulfilling a number of eligibility criteria (implementing strong macropolicies; adhering to internationally accepted standards; maintaining constructive relations withprivate creditors; ready to adjust their economic and financial programs as needed). The CCL,therefore, incorporates a number of elements from the Commission’s prequalification proposal.However, the prequalification approach of the CCL, important as it is in setting a precautionaryline of defense against financial crisis and contagion, should be seen as a complement to (not areplacement for) the IMF’s other financing facilities.

Unconditional LendingThe Commission recommends that the IMF be precluded from conditioning itsfinancial support to member countries on the achievement of economic reforms,other than reforms required to meet prequalification conditions.

We do not believe that this recommendation is desirable or feasible.

In making this recommendation, the Commission argues that IMF conditionality is generallyineffective, that it allows the IMF to wield too much power over the economic policies ofborrowing countries, that it strengthens the executive branch of borrowing nations at the expenseof their legislatures, and that the IMF often fails to enforce its conditions. The only apparentexception to the general prohibition on conditionality is that the IMF should establish “a properfiscal requirement to assure that IMF resources would not be used to sustain irresponsible budgetpolicies.”


In our view, the practice of providing phased financial support conditioned on progress inimplementing economic reforms is central to the effectiveness of financial assistance.Conditionality is no guarantee of success – ultimately, sovereign governments are responsible forthe decisions that shape the performance of their economies – but it is central to severalfundamental objectives:

• Encouraging countries to address the macroeconomic imbalances and structuralweaknesses, which gave rise to the need for external financing. This is critical tostemming financial crisis, promoting recovery and growth, and reducing the risk of futurecrisis. The Commission acknowledges the importance of a sound fiscal policy but makes noaccommodation for conditions on the monetary policy framework, the exchange rate regime,the scope for exchange rate intervention, central bank support to financial institutions orother actions that are likely to be critical to restoring confidence and promoting recovery.Indeed, this has long been a core objective of Fund activity. And there is substantialevidence that linking IMF financing to steps to, for example, improve a country’s taxcollection system, strengthen the financial sector, reduce government subsidies, in factstrengthens the hand of national authorities committed to reform.

• Helping to ensure, along with other measures, that IMF financing is used for thepurposes for which it is intended. Policy conditionality, in combination with safeguards inthe form of transparency, financial controls and auditing requirements, are important toreduce the risk of misuse of IMF resources.

• Helping to ensure that the borrowing country has the capacity to repay the IMF ontime. Without the capacity to apply conditions to its loans, the IMF would have virtually nomeans to promote the economic changes necessary to improve the countries’ ability to repay.

Of course the conditions on which the IMF provides financing need to be carefully designed tofit the particular economic circumstances of the country involved.


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EMBI Brady BondsEMBI Global120 day repayment120 day rollover

Graph 1: Timeline of the Recent Financial Crises, 1997-2000Timeline of country crises vx. JP Morgan Emerging Bond Market Index (EBMI Brady Bond and EMBI Global spreads over U.S.Treasuries, in bp)

Russia

Brazil

Korea

Indonesia

Thailand

Source: JPMorgan (Bloomberg). The EMBI Sovereign series is available from 1991 onward; however, it covers the spreads of Brady Bonds over U.S. Treasuries. The EMBI Global series was created in 1998 as a broader measure.

Maturity and Pricing of LoansThe Commission recommends that IMF loans should have a short maturity (e.g.,a maximum of 120 days, with only one allowable rollover), and should beprovided at a penalty interest rate (i.e., a premium over the sovereign yield paidby the member country one week prior to applying for an IMF loan).

In our view, these recommendations are not desirable. The proposed 120-day lending window(even with one rollover) is an unrealistically short repayment period. Even in the successfulrecent cases, countries needed substantially more than four months (120 days) to be in a positionto repay the loans extended by the official sector. Providing IMF assistance with such shortmaturities could undermine, rather than support, prospects for repayment and recovery.

The Commission’s recommendation of a penalty rate calculated on the basis of sovereign yieldsone week before the member country applies for an IMF loan would also be counterproductive.This would entail in most casesinterest rates so high (see Graph 1)that these loans would worsen theunderlying financial position of theborrowing country.

While we find the Commission’sspecific recommendations onmaturity and pricing to beundesirable, we do believe that it isimportant for the IMF to carefullystructure the terms of its financing insuch a way that reduces moralhazard risks, discouragesexcessively frequent or prolongedrecourse to IMF resources, andencourages an early return to theprivate markets, especially in caseswhere exceptional amounts of IMFassistance are provided. With theseobjectives in mind, the United Statesled an important innovation in thisarea with the creation in December1997 of a new IMF facility: theSupplemental Reserve Facility(SRF). This marked a fundamentalchange in the terms and conditions of IMF lending, emphasizing financing on shorter terms atpremium rates of interest. Since the creation of this new facility, a substantial portion of IMFlending in large programs has been provided on so-called SRF terms – interest rates that are atleast three percentage points above short-term market rates, and maturities of two years or less.Experience with this facility has been very positive, both in supporting economic recovery andencouraging realistically early repayment.


More recently, we have sought in the IMF to win support for our view that all non-concessionalFund lending should in future be based on the principle that charges should escalate the longercountries have Fund money outstanding and, above certain thresholds, the larger the scale offinancing. We are also seeking changes that would encourage more limited and effective use ofthe Fund’s vehicle for medium/longer term lending, the Extended Financing Facility (EFF). Inour view, the utility of this facility is in supporting those few, carefully targeted cases where boldstructural reforms are needed to secure stabilization and where the balance-of-payments benefitsof structural reforms may require a long time to appear and where countries have limited capitalmarket access.

Credit LimitsThe Commission recommends that the IMF have the capacity to lend on asubstantial scale to countries that have met its prequalification criteria, withrestrictions on the amounts available in order to reflect the borrowinggovernment’s capacity to repay.

We share the view that the IMF should have the capacity to respond to crises in membercountries on a scale consistent with the scale of the crisis. However, we do not think that theCommission offers a feasible approach to establishing appropriate credit limits.

The IMF currently has in place access limits that govern the amount of financing available tomember countries under its programs. These existing IMF limits allow countries to borrow100% of their IMF quota per year, with a cumulative limit of 300% of quota under normal IMFStand-By or Extended arrangements. (The level of a country’s quota is broadly determined byits economic position relative to other members. Economic factors considered include members'GDP, current account transactions, and official reserves.) In exceptional cases, the IMF mayapprove arrangements exceeding these limits, but most programs are financed at a level wellbelow the access limits. There are also provisions in the IMF for exceptional access to resourcesin cases of systemic crisis – through the Contingent Credit Line and the Supplemental ReserveFacility. Under the CCL, access is expected to be within a range of 300-500 percent of quota.Under the Supplemental Reserve Facility, access is determined based on considerationsincluding a member’s financing need, its capacity to repay, the strength of its reform program,and its record of cooperation with the Fund in the past.

We think that the Fund’s current access limits provide the appropriate basis for guiding IMFlending to member countries. Strict controls are needed on IMF lending to mitigate moralhazard, preserve the Fund’s catalytic role, and provide the incentives for countries to undertakestrong reform efforts, which are essential for ensuring that drawings from the IMF are repaid.

It is unrealistic and undesirable to hold out the prospect of IMF lending at a level equivalent, forexample, to one year of a member government’s tax revenues. Such a credit limit woulddramatically increase the level of Fund financing to qualifying countries, resulting in very largebailout packages that would surpass the financial capacity of the IMF and increase moral hazard.For instance, Brazil’s annual tax revenue is approximately $139 billion, many times the amountof its quota in the IMF ($4.5 billion) as well as its most recent Fund program ($14.5 billion).


Elimination of IMF Concessional LendingThe Commission recommends that the IMF’s concessional lending instrument, thePoverty Reduction and Growth Facility (PRGF), be closed. Further, theCommission suggests that long-term assistance to foster development andencourage sound economic policies should be the responsibility of thereconstructed World Bank or the regional development banks.

In our view, this recommendation is neither desirable nor feasible. The recommendation rests onthe premise that the IMF is not well-suited to carry out a concessional lending role, has not doneso effectively, and that the multilateral development banks (MDBs), in particular the regionaldevelopment banks, would do a better job. This premise and the Commission’s recommendationare not well-grounded, on several counts.

First, one of the clearest lessons of development experience is that economic growth is critical topoverty reduction, and that sound macroeconomic policies are critical to growth. Growth is thenecessary basis for generating resources for investment in primary education, health care, ruralinfrastructure, and other areas critical to poverty reduction. A strong macroeconomic policyenvironment – one that, for example, supports currency stability and keeps inflation in check – isessential if a country is to avoid capital flight, make effective use of development assistance, andlay a durable foundation for broad-based growth and poverty reduction. Helping countries set upappropriate macroeconomic frameworks is the IMF’s particular expertise and is not an area ofcompetence or experience for the MDBs. While the IMF is by no means infallible, there issimply no other institution with the technical expertise to design the essential and highlyspecialized policy conditions that the Fund provides in this area.

Second, the Commission’s suggestion that the Fund could be effective in providingmacroeconomic advice through its Article IV consultations, but no financing to accompany suchadvice is, in our view, wholly unrealistic. Development experience suggests that, whilefinancing is no guarantee of success, countries needing to take challenging, sometimes politicallydifficult measures are unlikely to show the same degree of attention and receptivity if IMF policyadvice comes without any financial underpinnings.

Third, it is important to recognize that the IMF’s concessional lending activities are financed bybilateral contributions of member countries in addition to and separate from contributions in theform of IMF quotas. Those activities are largely financed by other member countries, and theywill have a proportionately greater voice in deciding how these resources are used. Currently,there is a strong consensus among the Fund’s membership that concessional lending shouldcontinue, partly for the reasons noted above, but also based on the view that IMF financingshould be available to all its members, and that the Fund’s poorest members cannot affordfinancing on non-concessional terms.

All of this said, we do believe that the IMF’s role in this area needs to change significantly. Therecently created PRGF, the successor to the IMF’s Enhanced Structural Adjustment Facility(ESAF), represents an important shift in Fund operations in poor countries. Under this approach,there is to be a clearer division of labor between the World Bank and the IMF, with the Banktaking the lead in providing advice on the design of growth-enhancing national poverty reduction


strategies and structural reforms, while the Fund will focus on promoting sound macroeconomicpolicy and structural reforms in related areas, such as tax policy and fiscal management. Thisdivision of labor should be accompanied by a streamlining of conditionality to avoid overlap andpromote coherence. It is expected that both institutions will focus on a smaller number of clearperformance targets that are aimed at maximum poverty impact, are set realistically, and are thenmore rigorously adhered to.

No Future Quota Increases; Private Market Borrowing in a CrisisThe Commission recommends against further quota increases for the foreseeablefuture, and that, in the event of a crisis, the Fund should borrow as needed eitherfrom the private sector or from credit lines of member countries.

While it is difficult to predict the future with confidence, we agree that the IMF’s liquidityposition is comfortable currently, and we do not see a need for a quota increase in the nearfuture. As of March 2000, the IMF had $289 billion in total resources, of which $138 billionwas usable. (The remaining $161 billion is currently in the form of existing loans and currencyholdings of countries with weak currencies.) In light of the Fund’s comfortable liquidityposition, we consider the first part of this recommendation, counseling against a quota increasefor the foreseeable future, to be both desirable and feasible.

We agree that the Fund should be able to borrow from credit lines of member countries inappropriate circumstances. This possibility is already provided for by the General Arrangementsto Borrow (GAB) and the New Arrangements to Borrow (NAB). The GAB and the NAB arearrangements between the IMF and a number of member countries and institutions under whichsupplementary resources can be provided to the IMF. Eleven industrial countries participate inthe GAB, which was created in 1962. Twenty-five countries and institutions participate in theNAB, created in 1998. The total amount of resources available to the IMF under the NAB andGAB combined is SDR 34 billion, about $46 billion.

While the Fund under its Articles of Agreement has the authority to borrow from privatemarkets, the IMF’s membership has not taken advantage of this authority for two principalreasons. First, it is not clear that the IMF could raise substantial amounts of money from themarkets without compromising its members’ financial claims on the institution. For the IMF toborrow at AAA rates, its members may have to back such borrowings with their currencysubscriptions, similar to the way that callable capital of World Bank members backs upborrowings by the Bank. This would involve a fundamental change in the IMF’s financialrelationship with its members. (To the extent that borrowings need to be backed by currencysubscriptions, those subscriptions would be impaired.)

Second, we think that it is necessary and appropriate for members to exercise close oversightover the financial resources and operations of the Fund. The quota increase mechanism providesan effective means for such oversight.


Article IV ConsultationsThe Commission recommends that OECD members be allowed to opt out ofArticle IV consultations, though all other IMF members would be required toparticipate. The Commission further recommends that all Article IV reports bepublished promptly.

We agree that Article IV reports should be published promptly and have actively advocated thisposition in the Fund as part of our broader efforts to increase transparency. Towards this end,the United States led the effort to set up a pilot program for the publication of countries’ ArticleIV staff reports. Under this program, 29 countries, including the United States, have now madepublic the staff reports prepared as part of the Article IV surveillance process. Nearly 20additional countries have agreed to release their staff reports in the future.

We do not think it is desirable, however, to allow OECD countries to opt out of the Article IVprocess. Their participation underscores the reality that all IMF members play a part in theinternational monetary system, and reinforces the universal nature of the Fund. The health ofindustrialized country economies in particular is critical to the system. The United States seesthe Article IV process as an important vehicle for encouraging needed adjustment and reform inindustrialized countries no less than in emerging market economies or developing countries. Anumber of OECD countries (e.g., Mexico, Korea and Turkey) are emerging market economieswhose health is important to regional/international stability, and are, in some cases, users of IMFresources. Allowing them to opt out of the Article IV process would undermine the importantongoing efforts to make the process a more effective vehicle for avoiding financial crises, andwould put the Fund in the imprudent position of providing financing to countries that are not partof its surveillance activities.

Transparency in IMF AccountingThe Commission recommends a variety of steps to improve transparency in IMFaccounting – broadly that the IMF’s accounting system be simplified andreformed to mimic standard accounting procedures for representing assets andliabilities and income and expenses. The Commission also suggests that theIMF’s SDR accounts be incorporated into the IMF’s overall accounts so as toobtain “an accurate view of net providers and users of subsidized funding.”

We believe that the recommendation to improve transparency in IMF accounting is desirable andfeasible. We agree that the IMF accounts should be as transparent and understandable aspossible and that there is scope for progress in this area, while bearing in mind that the accountsreflect complexities in the nature of the Fund’s financing and operations.


Although there is more to be done in this area, a number of steps have been taken with the strongbacking of the United States to enhance information available about the IMF’s financial position.

• Most recently, a decision was taken to publish quarterly details on the financing of theFund’s operations by members – the “Financial Transactions Plan” (formerly known as theoperational budget). The Financial Transactions Plan will provide information about theIMF’s holdings of individual countries’ currencies considered useful as a funding resource(i.e., those members considered financially strong enough to support the extension of Fundcredits).

• The Fund already posts a wide range of financial information on its web site. This includes:a weekly update of its financial activities, monthly information on its liquidity position andthe resources available for lending, up-to-date information about Fund credit outstanding,and extensive country-specific data on transactions with its members, including loans, loandisbursements and repayments. The aggregate amount of Fund lending is already clearlylabeled as financial assistance in the “IMF Financial Activities” report, which is updatedweekly. The list of individual loans outstanding indicates the date the arrangement wasapproved and the date it expires.1

• Annual audited financial statements which have traditionally been included in IMF AnnualReports are now also published on the Fund’s website along with quarterly financialstatements. Financial statements are prepared in accordance with generally acceptedaccounting principles and are accompanied by detailed explanatory footnotes. For the firsttime this year, the Fund’s financial statements for the latest financial year (May 1, 1999 toApril 30, 2000) will be prepared in accordance with internationally accepted accountingstandards; they will also be published (per established practice) in the IMF’s annual reportand on the public web site.

Regarding the recommendation to incorporate the SDR accounts into the Fund’s generalaccounts, given the very different nature and purposes of the Fund’s general resources (i.e.,quota-based) and SDR resources, we think there is merit in having distinct accounts for the two,and note that a change to this practice would require an amendment to the IMF Articles ofAgreement. We are prepared, though, to explore whether there is some presentational advantagein showing a country’s net use of SDRs.2 Indeed, it is our understanding that the new financialstatements noted above are expected to specifically identify net use and holdings of SDRs, aswell as credit outstanding, usable and non-usable currency assets, liquid claims on the Fund, anda cash flow statement.

1 All Stand-by Arrangements must be repaid within 5 years of the date of expiration; Extended Arrangements mustbe repaid within 10 years; and ESAF/PRGF arrangements must be repaid within 10 years.

2 The IMF publication International Financial Statistics includes a table providing data on each member country’sposition (and the membership as a whole) with respect to use of IMF credit and SDRs. What is not provided is aseparate column showing a country’s net use of SDRs, though this can easily be derived from the data provided bysubtracting a country’s net cumulative allocation of SDRs from current holdings of SDRs.


Repayment Obligations: IMF Priority; Negative Pledge;Ineligibility in the Event of Default

The Commission recommends that the IMF be given priority over all othercreditors, that members exempt the IMF from application of negative pledgeclauses, and that member countries that default on IMF debts not be eligible forfinancing from other multilateral agencies or member countries.

These recommendations are already largely reflected in the way that IMF financing is provided.At present, the IMF, as a de facto preferred creditor, already enjoys priority status with regard toother creditors. As for exempting the IMF from negative pledge clauses, the Commission itselfnotes that the IMF is frequently exempted from the operation of such clauses and that otherapproaches are available, even absent an explicit exemption, to permit the IMF to enforce itsrepayment rights.

Regarding the proposal to suspend eligibility for other IFI financing if a country is in arrears tothe IMF, generally this is already the case. However, we recognize that there may be casesrequiring special consideration, such as during workouts, humanitarian crises, or certain post-conflict situations where lending would clearly advance our national interests.

U.S. Department of the Treasury Response to the IFI Advisory CommissionResponse to the Recommendations on Reform of the MDBs – Page 27

Response to the Recommendations on Reform of theMultilateral Development Banks

Limits on MDB assistanceThe Commission recommends phasing out MDB lending to countries with annualper capita incomes above $4,000 or an investment grade international bondrating and sharply limiting assistance to countries with annual per capitaincomes above $2,500.

We do not support a rigid eligibility cutoff based solely on these criteria, as it is neither desirablenor feasible.

The Commission’s recommendation rests on the assumption that a country’s potential access toprivate markets at some level automatically translates into an availability of private finance at therates, maturities and volumes appropriate for the full range of purposes necessary to lay the basisfor sustained growth and poverty reduction. This is clearly not the case. Even relativelyproductive emerging markets face severe limitations in the volume of private capital that isreliably available for long-term development investments with the medium to longer-termmaturities that are necessary. Moreover, the private capital that is available comes with interestrates that are prohibitive for development programs. These market limitations are of particularimportance with respect to the availability of support for development programs such as policy-based sector reforms.

If the Commission’s recommendations were applied as written, countries as diverse as Brazil,Indonesia, Turkey, and South Africa – where important, long-term U.S. strategic and economicinterests are clearly at stake -- would be denied access to MDB assistance. If theserecommendations were applied today, the World Bank and regional development banks wouldbe effectively precluded from lending of any kind, in any circumstances. These countriescurrently absorb fully one-third of U.S. exports, a share that has risen markedly over the pastdecade. Moreover, they are home to a substantial share of the worlds poor. For example, morethan 36 percent of the population of Latin America lives on less than $2 per day. Graduationpolicies designed with a fixed and excessively low threshold risk worsening economic outcomesin these countries and increasing the risk of future crises. This could undercut or prolong thepath to sustainable market access, and ultimately delay the time when these governments willgrow out of the need for official support.

We believe MDB support for emerging market economies needs to be more selective andfocused on areas where it can increase their overall capacity to access private capital resourceson a more durable basis. MDBs should emphasize lending to:


• promote key public investments, particularly for the public goods that will not be adequatelysupplied by private markets;

• attract additional private capital flows, by among other things, reducing obstacles to privateinvestment; and

• counteract temporary disruptions in access to private external capital.

Accordingly, we believe that the MDBs should:

• have a strong presumption against lending where private finance is available on appropriateterms;

• reduce the share and volume of their lending to emerging economies over time, withcomplete graduation as a clear objective; and

• use their loan pricing flexibility more systematically to encourage graduation.

Severely Curtail Direct MDB Support for the Private SectorThe Commission recommends eliminating direct MDB loan and equityinvestments in the private sector, closing the IFC, and limiting future support fortechnical assistance and the dissemination of best practices standards. TheCommission would also eliminate the Multilateral Investment Guarantee Agency,which provides political risk insurance to private investors.

We do not support eliminating the private-sector focussed operations of the MDBs or haltingMDB lending, guarantees, or insurance for private sector investors.

The Commission’s recommendation is premised on a view that the public benefits (even in poorcountries) resulting from official credit for private-sector entities are not necessary, and thatofficial credits crowd out private investors. We believe this view ignores some importantrealities:

• capital markets are imperfect and the presence of private sector investment opportunitiesdoes not mean, ipso facto, that they will be financed;

• private capital does not flow to risky countries in the volume and for the purposes necessaryto stimulate enduring and equitable growth;

• direct MDB engagement with the private sector has been an instrument for wider privatesector development reforms; and

• limited MDB lending to the private sector has catalyzed many times its amount in new andadditional private flows.

We believe that U.S. interests and the realities of developing country and emerging marketfinance fully justify carefully focussed MDB support for private sector operations:

• medium and long-term domestic finance is virtually unavailable for many sectors/projects inmost of the world’s countries;


• private finance can be extremely susceptible to short-term disruption;

• private sector finance for properly structured enclave investments in the poorest countries canyield substantial social benefits;

• modest amounts of MDB finance can privatize state-owned enterprises, providing both socialgains and new opportunities for subsequent private investment;

• despite liberalization and reform during the 1990’s, emerging market risk remainsunacceptably high, and project returns too low, for most private investors and lenders; and

• despite substantial progress in reforming the overall investment climate, uneven emergingmarket accounting practices and investment regulation still present substantial challenges tofinancial due diligence in these areas which further discourages long-term domestic lending.

Transactional finance from MDB private sector operations is an integral component of theMDBs’ broader sector restructuring and policy reform efforts in virtually every country in whichthe MDBs are active. Given the real obstacles that still exist to long-term emerging marketlending and investment, MDB private sector operations are making important and clearcontributions to create new opportunities for investment, reduce risk and volatility, and increaseaccess to capital. In particular, the private sector windows play the following vital roles:

• Investment Climate Development by promoting sound economic policies, divestiture ofstate-owned enterprises, capital market development, investment rules and protection, andfree flow of capital;

• Risk Mitigation through innovative co-financing and guarantee arrangements, application ofperformance clauses to government partners, and early due diligence; and

• Market Access Facilitation by restoring investor confidence in crisis times by investing inthose disrupted emerging markets with sound economic and investment climatefundamentals.

The MDB private sector windows have been instrumental in catalyzing the additional privatefunding, and the private sector development more broadly, which would not otherwise haveoccurred given the realities of developing country finance. Given the risk of crowding outprivate finance, direct MDB support for the private sector must be provided very selectively andwith great care. There would be no compelling case for involvement by the MDBs in the privatesector if all they brought to the table was cheaper finance.

Shift World Bank Operations to Regional Development BanksThe Commission recommends eliminating World Bank operations in LatinAmerica and Asia.

We do not support the Commission’s recommendation to restrict lending in these regions to theregional development banks.

The World Bank’s global focus and unparalleled cross-regional experience represent anenormously valuable asset to developing countries in all of the regions, and to the shareholdercommunity more broadly. In an increasingly integrated world economy, we believe that the


World Bank should be at the center of the global effort to develop and deliver core programlending and targeted project finance aimed at building and supporting the institutions ofdevelopment and poverty reduction. The location, shareholding structure, and operationalexperience of regional banks are also important assets, but in general they are not able to matchthe technical resources of the World Bank. Indeed, knowledge transfer across regions is anintrinsic asset of the World Bank. We believe that our multiple interests are best served byworking to ensure that the each MDB brings its particular expertise, including its unique regionalperspective, to bear whenever appropriate, while playing a clearly subsidiary role where othersare better positioned to bring maximum value.

We fully agree that increasing cooperation among the MDBs, sharpening their areas ofcomparative advantage, and reducing operational overlaps would increase the system’s overalldevelopment effectiveness and should be pursued as a matter of priority. It makes little sense forthe regional development banks or, indeed, the World Bank, to build and maintain a capacity toundertake every kind of activity relevant to development in every country in which they couldplay a role. Responsibility for certain kinds of project lending should more often shift to theregional development banks, where they have proven expertise. We have been workingaggressively to give these views concrete expression in the form of formal Memoranda ofUnderstanding between the World Bank and the regional banks that articulate a division of laborreflecting comparative advantage and selectivity. In addition to these MOUs, the CountryAssistance Strategies (CASs) are continuing to address the appropriate division of labor inborrowing member countries. The World Bank and IFC produce joint CASs designed tomaximize Bank Group synergies in promoting private sector development.

As part of the process of improving institutional focus and specialization across the system, theWorld Bank will need to deliver on its commitment to accept a more coordinating or supportingrole with respect to other agencies. For example, other agencies and bilateral donors that oftenwork closely with NGOs often have a clear comparative advantage in the area of humanitarianassistance in post-conflict situations.

Transfer World Bank callable capital to regional development banksThe Commission recommends transferring a portion of the World Bank’s callablecapital to the regional development banks and reducing or reprogramming theremainder in line with a declining portfolio balance.

The Commission recommends a significant reduction in World Bank non-concessional lendingin order to free up callable capital that could then be reprogrammed to support Bank assistancefor other purposes, or transferred to the regional development banks. We do not believe theCommission’s proposals in this respect are either desirable or feasible. Specifically, we do notsupport the sharp reduction in World Bank lending capacity proposed by the Commission for theshort-run, nor do we believe its proposals are workable legally or attainable politically.

Shareholder capital in the MDBs has two components: paid-in and callable. Paid-in capital isthe amount of funding that countries actually transfer to the institutions to support their market-based lending operations. Callable capital is funding that shareholder countries have formallyagreed to make available on a contingency basis in the event that the bank is not able to meet its


liabilities. Callable capital therefore represents the contractual commitment of shareholders suchas the United States. Paid–in capital is typically a fraction of the total capital of a bank. Forexample, for the IDB’s seventh capital increase in 1995, paid-in capital represented only 2.5% ofthe total capital increase. The Banks issue bonds against their assets, including the paid-incapital and the callable capital of investment grade shareholders (primarily the industrializedcountries) and use the proceeds to provide loans for development projects.

The Commission does not appear to have taken into account a number of major legal andfinancial issues that would be direct obstacles to the callable capital transfers/reassignments it isrecommending. The World Bank is one of the global capital market’s largest borrowers and iswidely viewed as one of its strongest. The Bank currently has about $116 billion of publicly-held bonds outstanding that have been issued against its callable capital. A transfer of thisunderlying asset would be fundamentally inconsistent with the terms and conditions on whichthese bonds were issued; there is a real risk that it could be potentially disruptive to the market,and it would clearly raise a host of highly complex legal and contractual issues. Beyond this, theWorld Bank’s 181 member governments have specifically given callable capital commitments tospecific institutions, typically through a complex legal and legislative process. Any materialchanges to these specific commitments would require most (perhaps all) of the shareholders toreturn to their own legislatures for the necessary approvals and amendments.

Apart from the major technical obstacles to a callable capital transfer of the kind recommendedby the Commission, any such transfer would need to gain a level of international support that ishighly unlikely. Specifically, it may require amendment of the Articles of Agreement of each ofthe affected institutions, which would require at least a 75 percent majority vote of theshareholders.

Eliminate MDB Role in Mitigating Financial CrisisThe Commission recommends that the MDBs should be precluded from financialcrisis lending.

We do not support precluding the development banks from financial crisis lending.

While we agree that MDB financial crisis lending should be limited to exceptional cases, we alsobelieve that direct MDB support in crises can be critical to the success of recovery programs byhelping to minimize long-term damage, sustaining and restoring development momentum, andcontributing to intensified economic reform and restructuring. We view the MDBs asparticularly well-positioned to provide significant value added in the effort to:

• avoid unnecessary fiscal contractions in fiscal expenditures;

• restructure banking and other financial institutions; and

• minimize the adverse impact of the crisis on the poor by, for example, strengthening socialsafety nets.

The upsurge in MDB “crisis” lending in the late 1990s, most of which was provided on shortermaturities and higher rates, was appropriate in the context of the acute and generalized reductionof private capital flows to emerging economies. The risks were high. However, the economic


results that have emerged – in terms of helping to put in place fundamental reforms needed torestore private sector confidence – have been broadly positive. A large measure of economic andfinancial stability has been restored and economic growth prospects are now far better thanwould otherwise have been expected.

MDB intervention was achieved without any additional budgetary costs for MDB membergovernments. Moreover, it is our view that the existing capital base of the three largest MDBhard loan windows (the IBRD, IDB, and ADB) is sufficient to maintain a cushion in lendingcapacity that would enable these institutions to respond quickly with a substantial, buttemporary, expansion of lending if justified by a future adverse shift in global financialconditions.

While MDB hard-loan lending rose sharply to help members deal with the recent financial crisis,it has now returned to levels more consistent with, and in the case of the IBRD well below, thepattern of pre-crisis lending.

The long-term pre-crisis trend shows that annual MDB hard-loan window lending has beenrelatively steady in both the IDB and ADB, and actually declining in the IBRD despite theaddition of nineteen new member countries in Eastern European and the former Soviet Union.

Replace MDB Loans with GrantsThe Commission recommends that MDB support for physical infrastructure andsocial service projects in the poorest countries be provided through grants ratherthan loans and guarantees.

If implemented as proposed, this recommendation would limit the overall availability offinancial assistance to the poorest. Moreover, we believe that moving to an all-grant systemwould have negative long-term financial implications for the institutions and their shareholders.Over time, the effect would be to eliminate the reflows that derive from concessional loans(mainly repayments of principal) and that currently fund a substantial portion of the institutions’new concessional loan commitments. Individual donors rely, almost invariably by law, onannual legislative allocations of funding to support MDB operations in the poorest countries (i.e.,concessional loans for the most part). They cannot provide the long-term guarantee of futureresources that the Commission’s grant-based approach would require.

The lending terms of all four MDB soft-loan windows are already highly concessional; e.g., IDAcredits have a grant element of about 70 percent at current interest rates. The World Bank alsoprovides selective grants for research and other global public goods, HIPC debt relief, and tospur development in post-conflict countries. The IDB also provides some targeted grant funding.

The current approach of relying largely on highly concessional credits covers the administrativecosts of lending. It has two other advantages that would be lost under an all-grant approach.

• Over time, repayments on past credits play a major role in funding new credits that wouldhave to be offset by donors to maintain the level of new commitments. For example, reflowswill finance over 38 percent of IDA-12 lending – the most recent replenishment of IDAresources. This recycling of IDA repayments into new lending favors the poorest countries


in that the more advanced former and current recipients of IDA now account for roughly one-half of current reflows.

• The reality that credits must eventually be repaid helps to build financial discipline and debtmanagement skills in borrowing countries. It also provides an added incentive to ensure thatborrowed funds are used selectively and wisely.

We do believe there is scope for greater differentiation of soft-loan lending terms among thepoorest countries, providing the very poorest and least creditworthy borrowers with the highestdegree of concessionality. It is important to ensure that the stock of highly concessional debt isaccumulated and managed in a way that minimizes the prospect of future debt servicingproblems. We believe there is positive value in maintaining the lending approach of the MDBsand consequently, we do not believe it is desirable to redesignate them as “Agencies”.

Make Payments Directly to Service SuppliersThe Commission recommends that “poverty reduction grants” to eligiblecountries (poor countries lacking capital market access) be paid directly toservice providers after there is independently verified delivery of service.

We fully share the Commission’s underlying objective to improve the efficiency andeffectiveness of development assistance, to minimize the scope for corruption, and to link MDBsupport systematically to solid performance by service providers. But while the specificapproach proposed by the Commission might be appropriate in some individual circumstances,we do not believe it practical to institute this approach as standard practice.

Most social sector development operations have a much broader focus and scope than providinga discrete and easily quantifiable service. In fact, many require a series of concerted actions overa period of many years, and with sustained and extensive government involvement. Forexample, a rural school or health clinic could well (and we would argue often should) be built byan independent contractor. But the longer-term viability of the school, and therefore whether itactually delivers the development benefits that are intended, requires regular governmentinvolvement and support through the budget process.

We are also concerned that the proposal could:

• undermine the basic objective of building local capacity to implement projects effectively,including the need to improve the quality and performance of the government institutionsinvolved, and to build transparent procurement systems;

• reduce private sector and civil society interest in bidding for selection as a service provider;the built-in payment delays specified by the Commission’s proposal would likely be adisincentive to smaller private firms and NGOs, who would need to seek interim financingthat could well be in short supply; and

• increase the cost of projects, because of additional risks associated with bridge financingrequirements, the additional costs of the independent verification process, and the potentialadditional costs of outsourcing core services.


Establish Institutional Reform Loans to Support Policy ReformThe Commission endorses direct MDB loan support for institution building andpolicy reform, and recommends a specific lending instrument whose terms andconditions differ substantially from existing MDB instruments designed for thispurpose.

While the Commission’s proposal incorporates a number of basic principles and objectives withwhich we are in fundamental agreement, the specific financing instrument the Commissionproposes is unlikely to be a particularly attractive device, compared to existing instruments, forencouraging good performance.

For example, the proposed “Institutional Reform” loan program would be based on fullamortization of principal and an interest subsidy of between 10-90%. Terms of the loan could beadjusted over the life of the loan to reflect good or poor project execution. It could be, however,counterproductive to increase loan charges when a country is experiencing difficulty deliveringon its reform program. That may be the time when it needs the most help servicing its debt.

Notwithstanding these technical difficulties, we share the Commission’s basic presumptions inmost significant respects. Specifically, we welcome the Commission’s:

• endorsement of direct MDB assistance to help build the core public institutions and promotethe basic policy reforms necessary for equitable economic growth and sustaineddevelopment;

• strong agreement that objective and consistent assessments of borrower performance shoulddirectly guide MDB lending choices;

• conviction that MDB instruments and operations need to incorporate, in a more effectivemanner, clear and monitorable performance benchmarks and strong incentives for achievingthem; and

• belief that monitoring of compliance with these conditions should be fully transparent.

These views have been the basis for much of our reform advocacy in the MDBs during the pastfive years, and they have directly shaped much of what has been achieved. All of the institutionsare focussing both lending and analytical work much more heavily on building institutionalcapacity in borrowing countries, and on identifying and supporting the core policy reformsnecessary to create a favorable climate for market-driven growth and development. New loansare building in more specific monitoring criteria, are being disbursed in tranches on the basis ofmonitorable performance on agreed conditions, and are being directed intensively towardcountries that are moving demonstrably ahead with these reforms and using assistanceeffectively. In particular, the World Bank, African Development Bank and the Inter-AmericanDevelopment Bank have adopted detailed criteria for assessing performance and are allocatingall new concessional lending on that basis. We are presently working toward a similar system atthe Asian Development Bank. And finally, the aggressive transparency agenda we have pursuedwith great success in all of the institutions has opened them up to a degree of independent publicscrutiny and quality control that can only improve their effectiveness.


In our view, these steps build in much of the additional clarity, accountability and performanceincentives that the Commission rightly seeks. That said, there is still room for additionalprogress, and we would welcome additional views on how this might be achieved mosteffectively.

The World Bank Should Concentrate on the Production of Global Public GoodsThe Commission recommends that the World Bank concentrate on the productionof global goods and serve as a centralized resource for regional banks.

We support the Commission’s desire for increased focus by the World Bank on the production ofglobal public goods, including serving as a center for technical assistance to the regionaldevelopment banks. However, we view this as complementing, rather than replacing, the Bank’sother development priorities for addressing poverty reduction.

We believe that the World Bank and other development institutions have the potential tosignificantly expand their efforts to promote global public goods and can make an enormouscontribution in helping to push the frontier of international collaborative efforts in this area.Regional MDBs should continue to emphasize regional projects that address cross-countryconcerns. Examples such as the Consultative Group on International Agricultural Research(CGIAR), the Green Revolution, and the onchocerciasis control program for river blindness inAfrica all demonstrate that innovative collaboration among the World Bank and other officialbodies delivers results. We believe that regional development banks also should continue toincrease their emphasis on developing regional approaches to regional development issues.

The World Bank and the regional development banks already provide significant support forglobal public goods. For example, the World Bank has committed almost $1 billion to more than81 HIV/AIDS-related projects in 51 countries and last year created a strategy to intensify itsactions in this area in collaboration with the Joint United Nations Program on HIV/AIDS, whichthe Bank co-sponsored. The African Development Bank and the Inter-American DevelopmentBank are also lending for HIV/AIDS programs, but on a much smaller scale. The World Bank isalso boosting its support for expanded childhood immunization and looking into new incentivesto stimulate development of vaccines against key infectious killers in poor countries – AIDS,malaria, and TB. In addition, the World Bank provides annual grants (currently $125 million)out of its regular administrative budget for its Development Grant Facility (DGF). The DGFworks in partnership with other development organizations in supporting development research(e.g., CGIAR) and other priority public goods, including seed money, for innovative, high risk,high return activities for which lending is not appropriate.


Increased U.S. Support for Poverty Reduction ProgramsThe Commission proposes that the United States should significantly increase itssupport of effective programs to reduce poverty.

We welcome the Commission’s focus on the critical importance of reducing poverty and fullysupport this recommendation of the Commission.

The United States provides substantially less official development assistance (ODA) as a shareof GNP than any other developed country. The 1998 U.S. ODA/GNP ratio of 0.10 percent wasless than one-half the 0.24 percent ratio recorded by all twenty-one members of the OECD’sDevelopment Assistance Committee. The United States ranked twentieth in the level of ODAwe provided by per capita ($32.65).

The level of U.S. development assistance appropriated annually has been consistently less thanthe Administration’s total request.

The Administration has substantially redirected the financial support we are providing to theMDBs in favor of the soft-loan windows and the highly concessional assistance they provide forthe world’s poorest countries. Funding for the soft-loan windows (including the GlobalEnvironment Fund) account for over 88 percent of the Administration’s FY 2001 Request for theMDBs. We have also publicly stated that we do not believe it is realistic for the hard-loanwindows to expect any new capital increases.

We also continue to accord priority attention to the issue of how MDB resources are deployed byworking with MDB management and members to improve the MDBs’ effectiveness in reducingpoverty. Our efforts center on such crucial issues as: greater lending selectivity, includingallocations based on borrower performance; intensified support for social sector investments andpublic goods; sharper focus on institutional and policy obstacles to equitable, market-basedgrowth; increased transparency and accountability within the institutions themselves; andimproved collaboration with other institutions and interested parties.

The Administration’s request for almost $920 million in support of the HIPC Initiative betweenFY 2000 and FY 2003 is another important demonstration of our commitment to work with ourdevelopment partners to enhance our assistance to the poorest countries that are committed tosound policies in their efforts to reduce poverty. We are also seeking Congressional approval ofa substantial increase in our bilateral funding to help the poorest countries deal with HIV/AIDSand other infectious diseases.

UR

.S. Department of the Treasury Response to the IFI Advisory Commissionesponse to the Recommendations on Reform of the MDBs – Page 37

Box 1: Assessing the Commission’s Negative Assessment of MDB SuccessesOverview of the Commission’s critique of the World Bank OED Measurement of Success

The World Bank’s Operations and Evaluation Department (OED) is an independent unit of theWorld Bank that reports directly to the Executive Board. It uses best practice standards and isinternationally respected for the quality of its work. The indicator used by the Commission is not an
accurate measure of the success or failure of Bank projects, and the Commission combinescategories to present an overly negative picture of the actual success rate.
The appropriate measure for the success of Bank projects is the OED outcome indicator. Thisreports whether Bank projects are likely to achieve both their development objectives and at least a10% rate of return. The outcome indicator takes into consideration all available informationregarding actual costs and benefits known at the time of evaluation as well as expected net benefitsover the remainder of the project's intended life. By this measurement, 72% of projects completed,and 81% of the dollars lent, in FY98-99 had satisfactory outcomes. This shows a markedimprovement over the 65% of projects completed, and 73% of dollars lent between FY92-94, ratedsatisfactory.

The Commission focuses on OED’s sustainability rating. This identifies projects that require closeattention by borrowing governments and the Bank to manage risks that may affect the net benefitsexpected after the time of evaluation. In this regard, it is not a measure of success or failure, butrather a “red-flag” for projects requiring extra oversight and vigilance due to factors such as countrycommitment to reform, country economic and financial policies, availability of funds for operationsand maintenance, institutional capacity, and political situation. The sustainability assessment ratesprojects as likely, uncertain or unlikely to be resilient to future risk.

OED’s 1999 Annual Review of Development Effectiveness (available on the Bank’s web site)showed that the share of projects with “unlikely sustainability” is declining. The share hasdecreased from 19% for FY90-93 to 14% in FY98-99. Weighted according to disbursements, theshare has fallen from 14% to 6%. The Commission lumped into this category any project whosesustainability was now unknown (e.g. a brand new project) to create a negative picture. A 14%rating should not be too surprising, since much of the Bank’s lending is for complex povertyreduction sectors in low-income and low-capacity countries.

Similarly, it is not surprising that the likelihood of success and sustainability increases with theincome of the borrowing country. This reflects the greater institutional capacity, performance andmore advanced stage of development of higher income borrowers. For Africa, the rate is 61%,compared to 83% for Europe and Central Asia. Poorer countries have higher levels of risk sincethey face the most formidable development challenges and have weak human and institutionalcapacity.

Nevertheless, we believe that the success rate can be improved, and we have been a strong supporterof Bank reforms that better incorporate OED evaluations into ongoing and prospective Bank lendingprograms.

UR

.S. Department of the Treasury Response to the IFI Advisory Commissionesponse to the Recommendations on Reform of the MDBs – Page 38

Box 2: Financial Accounting and the MDBs

Cost of Participating in the MDBs

The Commission Report claims, using hypothetical models, that the annual cost to governments of
participating in the MDBs is $22 billion, of which it estimates the U.S. share at $5.5 billion. In thereal world of congressional budgets, U.S. scheduled commitments for the MDBs averaged $1.2billion per year between 1995 and 1999, $700 million less than the level in 1996. The report fails tonote that the MDBs leverage our participation a great deal. Every $1 we contributed between 1995and 1999 generated $60 of development assistance.
The Report implies that the current US scoring methodology systematically underestimates the realcosts of participating in the MDBs because it does not explicitly include additional charges foropportunity costs or forgone earnings on the paid-in capital, soft-window contributions and retainedearnings of the MDBs. In addition, the Report assigns as a “cost” the risk that the callable capitalpledged by governments may be called.

The Report’s approach contradicts longstanding CBO and OMB practice on scoring US governmentexpenditures. When Congress appropriates funds for any purpose, for example to build a highway,it would be unreasonable to assert that a future budget “cost” of this one year of funding is sevenpercent (the rate used in the Report) year after year. Using this logic, a $100 million appropriationin 1950 to build a road, would have a cumulative annual “cost” to the American taxpayer of $350million in 2000 (7 percent of $100 million over 50 years). The real cost of the project is the amountof funds actually provided by Congress in 1950, not an ever-increasing accumulation of opportunitycosts.

As the Report briefly acknowledges, there has never been a call on capital for any of the MDBs.Further, equity available to the MDBs to cover “problem” loans is several multiples greater thanthat held by commercial banks. Therefore, CBO and OMB practice for 50 years has been to notassign a budget outlay for callable capital. We believe that the current accounting approach for thecost of MDBs is accurate and appropriate.

Subsidy

The Report states that both market-based and concessional loans confer a subsidy to borrowers. Bydesign, the concessional loans are highly subsidized (i.e., the grant element of IDA loans is nowabout 70%). This provides a substantial benefit to the poorest countries and is the reason the softwindows of the MDBs were created.

Hard window loan rates are set typically well below the rate at which most countries can borrow inthe private markets. They also are set high enough, however, for the MDBs to cover theiradministrative costs, provide adequate reserves and, in the case of the World Bank, for example,contribute grant finance for global development priorities such as IDA, the Trust Fund for Gaza andthe West Bank, HIPC, etc.

This subsidy has no cost to donor governments beyond appropriated contributions to the hard andsoft windows. With respect to the hard loan windows, the preferred creditor status of the MDBsenables them to raise funds at low rates in the capital markets and on-lend to borrowing members.However, we believe that the pricing of the hard windows should be evaluated to reduce incentivefor emerging market countries to rely on official financing when it is available on appropriate terms.

U.S. Department of the Treasury Response to the IFI Advisory CommissionDebt Reduction for the HIPCs – Page 39

Debt Reduction for the Heavily Indebted Poor Countries

The Commission recommends 100 percent debt reduction by the IFIs and bybilateral creditors for the heavily indebted poor countries (HIPCs).

100 Percent Debt Reduction by Bilateral Creditors

The Commission recommends that bilateral creditors, such as the U.S. Government, shouldextend full debt write-offs to those HIPC countries that pursue effective economic developmentstrategies. We support this recommendation. In the context of the internationally agreedenhanced HIPC initiative, we are forgiving 100% of the debt owed to the United States bycountries that qualify for HIPC debt reduction. This will result in the elimination of more than$3.7 billion in debt owed by the world’s poorest countries. We have encouraged other officialbilateral creditors to take similar actions.

100 Percent Debt Reduction by the IFIs

The Commission recommends that the International Monetary Fund, the World Bank, and theregional development banks write off in their entirety all claims against those HIPC countriesthat implement effective economic and social development strategies in conjunction with theWorld Bank and the regional development banks. Although we share the Commission’s goal ofsubstantial debt relief for HIPC countries committed to economic reform and poverty reduction,we do not support a complete write-off of IFI debt.

Substantial debt reduction for the poorest countries is a priority of the Administration. In 1996we led the development of the first comprehensive HIPC initiative. Last year we worked tostrengthen the initiative to provide deeper, broader, and faster debt relief for these countries. Theenhanced HIPC initiative also makes an explicit link between debt relief and poverty reductionas the countries commit to using the resources freed by debt relief to address critical social needsand promote broad-based growth.

The HIPC initiative was never intended as a panacea for the myriad development challenges ofHIPC countries or as a replacement for ongoing donor support. Rather, debt relief “should beseen as an integral part of the broader development agenda, and integrated into an overallstrategy of poverty reduction.”3 Enhanced HIPC relief provides countries the opportunity toconcentrate on productive investments related to poverty reduction rather than on servicing olddebt.

3 The HIPC Initiative: Delivering Debt Relief to Poor Countries, World Bank and IMF, February 1999.


The Costs of 100 Percent Debt Reduction

The United States and other nations have worked extensively to reach agreement on acomprehensive approach to addressing the debt problems of the HIPCs. Given that the HIPCswill continue to need substantial amounts of external assistance to finance future development,there has been a strong effort in designing the enhanced HIPC initiative to ensure that thefinancial costs of debt relief to the IFIs do not undercut their capacity to provide new assistance.

As shown in the table below, under the enhanced HIPC initiative the total cost of debt relief tothe IFIs will be about $14 billion. Financing the initiative poses a substantial challenge for theinternational community; even after the IFIs maximize the use of their internal resources,bilateral donor contributions of at least net present value (NPV) $3.6 billion will be required tocover the full costs of IFI participation in the initiative.4

In order to completely eliminate HIPC debt, costs for the IFIs would rise dramatically, to roughlyNPV$43 billion. It is not realistic to expect that the IFIs and bilateral creditors would be able tofinance these additional costs.

4

m

Box 3: Cost of Debt Reduction: 100% Commission Plan vs. Current PlanUS$ billion NPV, at end-December 1998

Institution 100% Reduction Current Plan DifferenceWorld Bank Group 20.3 6.3 14.0

IDA (17.9) (5.7) (12.2)IBRD (2.4) (0.6) (1.8)

IMF 6.2 2.3 3.9AfDB 6.9 2.2 4.7IDB 2.8 1.1 1.7Other 7.1 2.2 4.9Total 43.4 14.1 29.3Source: Based on HIPC Documents, creditor statements from the MDBs or, in the absence of such information,

the Debt Reporting System database of the World Bank. The data are for the 40 HIPCs.Note: The totals may not sum up due to rounding.

This assumes that the IMF and the World Bank cover 100% of their costs (NPV $8.6 billion), and that all otherultilateral creditors together cover one-third of their total costs (NPV $1.8 billion).


Implications of 100 Percent Debt Write-off

A significant portion of new concessional assistance from the MDBs comes from resources thatare being paid back to the institutions by previous borrowers. For example, under the currentIDA-12 replenishment, about 38 percent of the resources for new lending will come from repaidloans, or “reflows.” The most striking impact of the Commission’s recommendation that IFIswrite off 100 percent of HIPC debt is that reflows to the concessional windows of the MDBswould be cut by almost half, or about $31 billion (nominal) over the next twenty years. Reflowsto IDA would be cut by roughly 40%, reflows to the IDB’s concessional window would bereduced by about one-third, and reflows to the African Development Fund would be cut by over80%. Not only would this result in substantially fewer funds for future lending to the HIPCs, itwould also leave fewer funds for non-HIPC countries that use concessional loan facilities at theMDBs. To the extent that complete debt forgiveness would also require reducing developmentassistance for poor non-HIPC countries, it would in effect be “the poor funding the poor.”Concessional finance available for Africa, the continent with the most HIPCs, would be hurtmost of all.

Moral hazard and inequity of treatment

In recommending that 100% of HIPC debt be cancelled, the Commission arbitrarily draws a linebetween HIPCs and non-HIPCs in terms of debt sustainability. HIPCs would have 100% of theirdebt cancelled, while other poor and indebted non-HIPCs would receive no debt reduction. Thepurpose of the enhanced HIPC initiative is, in part, to reduce HIPC debt to a manageable level,placing the HIPCs on a more equal footing with other developing countries. Writing off 100%of the debt for a specific group of impoverished countries poses a severe moral hazard for otherpoor countries. In a sense, 100% debt cancellation rewards those poor countries with very highdebt levels in a manner that is likely to reduce future development assistance for other poorcountries.

U.S. Department of the Treasury Response to the IFI Advisory CommissionResponse to the Recommendations on Reform of the BIS – Page 42

Response to the Recommendations on Reform of theBank for International Settlements (BIS)

The Commission recommends that the BIS should promulgate new liquiditystandards to reduce the risk of financial crises, while remaining a financialstandard setter. It also recommends that the Basel Committee on BankSupervision align its risk measures more closely with credit and market risk. TheCommission calls for unspecified organizational reform and for expansion to begradual and deliberate so as to avoid disruption of the information exchange.

In general, we support the Commission’s recommendations regarding the BIS, as they largelyreflect U.S. views and the current initiatives of the BIS.

The BIS contributes to the promotion of international financial stability by providing a forum forinternational monetary and financial cooperation. The BIS hosts meetings of central bankers andprovides facilities for various groups, including the Financial Stability Forum secretariat and thecommittees of the G-10 governors.

The committees of the G-10 governors (which include the Basel Committee, the Committee onthe Global Financial System, and the Committee on Payment and Settlement Systems), theInternational Organization of Securities Commissions and the International Association ofInsurance Supervisors identify best practices and develop guidelines and standards. We believethat the efforts of these standard-setting bodies play an important role in the strengthening of theinternational financial system, thereby reducing the risk of future financial crises.

The United States has actively supported the updating and strengthening of capital adequacystandards as promulgated by the Basel Committee. In June 1999, the Basel Committee releaseda consultative paper on proposed changes to its 1998 Capital Accord. The proposed changes areintended to more closely align capital with credit risk and to ensure that capital adequacystandards remain responsive to innovations in risk management practices. The three pillars ofthe Basel Committee’s new capital adequacy framework are enhanced, risk-sensitive, minimumcapital requirements, an improved supervisory review process, and more effective use of marketdiscipline through disclosure. We support the further efforts of the Basel Committee that willcontinue through 2000.

We agree with the Commission that expansion of membership in the BIS should be judicious anddeliberate. We believe that the recent additions to shareholder membership have been beneficial,particularly as they have produced a more inclusive forum for central bankers to discuss theprevention and resolution of financial crises. The BIS added to its membership nine new centralbanks in 1996 and five more in 1999.

U.S. Department of the Treasury Response to the IFI Advisory CommissionResponse to the Recommendations on Reform of the WTO – Page 43

Response to the Recommendations on Reform of theWorld Trade Organization (WTO)

The Commission recommends that the WTO should not impinge on nationalsovereignty, either directly or indirectly through WTO rulings or decisions. Forcountries that do not comply with WTO dispute settlement panels, the Commissionrecommends that fines or trade liberalization should replace the ability ofcountries to take compensatory action through import restraints.

The Commission’s recommendations are based on a misunderstanding of the WTO. The UnitedStates maintains its national sovereignty as a member of the WTO. No ruling or decision by theWTO can extend the scope of U.S. commitments in the WTO without explicit legislative actionby the U.S. Congress. Neither the WTO nor its dispute settlement panels can force the UnitedStates to change its laws; only Congress can change U.S. law.5

Retaliation by the prevailing party through import restrictions is clearly a less desirable outcometo a WTO dispute than compliance by the losing party with a WTO ruling. Indeed, the WTOagreement describes compliance as the preferred outcome. If the parties to a WTO dispute wantto resolve matters by agreeing on equivalent, compensating trade liberalization, they can do sounder the existing WTO rules. However, compensation depends upon the willingness of theoffending party to provide compensation, and the parties must agree that such compensationwould offset the harm done to the economy of the injured party.

Failing compliance or mutually acceptable compensation, however, it is in the interest of theUnited States to have the suspension of benefits as an incentive for compliance. The injuredparty must have recourse to the most effective means to reestablish the balance of rights andobligations upset by violations of WTO obligations. To that end, a system of fines does notseem to represent an effective or practical response. It is not clear how the WTO could enforcethe payment of fines. Moreover, such fines could be perceived by member states as anunacceptable infringement on national sovereignty.

5 Section 102 of the Uruguay Round Agreements Act, enacted by the U.S. Congress in 1994 to implement theUruguay Round, which established the WTO, provides explicitly that no provision of the WTO Agreement, nor theapplication of any such provision to any person or circumstance, that is inconsistent with any U.S. law shall haveeffect. Private parties legally cannot use the WTO Agreement as a basis for challenging any Federal, state or localaction in court.

U.S. Department of the Treasury Response to the IFI Advisory CommissionResponse to the Statement by Commissioner Levinson – Page 44

Response to the Statement by Commissioner Levinson

Commissioner Levinson recommends, inter alia, that continued U.S. support forthe Bretton Woods institutions should depend on the U.S. voting against IFIfinancing for countries that are egregious abusers of core worker rights. He alsorecommends amendments to the WTO Agreement so it includes a core workers’rights provision and a new chapter to prevent narrow interpretations of GATTArticle XX “health and safety” and “endangered species” provisions. He alsorecommends that the USED have a stated policy that requires private sectorcreditors and investors to provide a substantial contribution to the financing ofFund programs.

Labor Standards in the IFIs

The United States has pursued a variety of initiatives in support of core labor standards in theprograms and policies of the IMF and MDBs.6,7 The Treasury Department has put in place aprocess by which core labor standards are routinely assessed in the context of its review of IFIloans as well as of planning and surveillance instruments. This process provides for input fromthe Departments of Labor and State, the International Labor Organization (ILO), and nationaland international labor union organizations and NGOs.

The U.S. Executive Directors have made clear, on numerous occasions, support for core laborstandards, including rights of association and collective bargaining, and frequently raise concernsrelated to these rights, where relevant, in IMF and MDB programs in specific countries.Through these interventions, the U.S. has played a key role in securing protection for core laborstandards in several important areas:

• U.S. efforts resulted in protections against the use of child labor in projects in Bangladeshand Indonesia and the establishment, within the World Bank, of a Child Labor Programdedicated to supporting efforts to combat child labor and other child labor-related programs.

• Several of the MDBs have adopted policy guidelines protecting labor rights and standards inlending programs, including rights of association and collective bargaining, and assessingcore labor standards in their planning processes.

6 U.S. policy on labor issues at the IFIs is guided by Section 526 (e) of P.L. 103-306, the Foreign Operations, ExportFinancing, and Related Programs Appropriations Act, 1995, and Section 610 (a) of the Foreign Operations, ExportFinancing, and Related Programs Appropriations Act, 1999.

7 Pursuant to Section 526 (e) of P.L.103-306, Treasury reports annually on the full range of its engagement on laborissues at the IFIs in its Annual Report to Congress on Labor Issues and the International Financial Institutions. Themost recent report was submitted in December 1999.

U.S. Department of the Treasury Response to the IFI Advisory CommissionResponse to the Statement by Commissioner Levinson – Page 45

• The World Bank has established a Labor Markets Group that works closely with the ILO,trade union and employer organizations, and other external partners. The Group supportsWorld Bank staff and borrowing countries through research and analysis, training, andoperational support, on the full range of labor standards and related labor issues.

Treasury’s objectives are to help ensure that IFI policies and practices with respect to laborissues are consistent with our support for core labor standards, and that project assistance beextended, where relevant, in support of core labor standards. In this area of IFI reform, we alsobelieve that there is important, further scope for changes. We will continue to press for moreattention to key labor issues in the work of the IMF and MDBs and greater cooperation with theILO. Our objectives require a multifaceted approach, which includes, and extends considerablybeyond, votes and statements before the respective Executive Boards.

Amendments to the WTO

With respect to the World Trade Organization, the Administration continues its efforts todevelop a consensus within the WTO on the relationship between trade and labor in response tomany of the same concerns and issues that were presented to the Commission and formed thefoundation of Commissioner Levinson’s dissent from the Majority Report. The WTO SingaporeMinisterial Declaration renewed the commitment of WTO members to the observance ofinternationally recognized core labor standards. WTO members also stated that the InternationalLabor Organization (ILO) is the competent body to set and deal with the standards and affirmedtheir support in promoting them. We believe that the WTO and ILO would benefit from activecollaboration and that the WTO should have a key role in analyzing the fundamentalrelationships between trade and labor. It is for this reason that the Administration has proposed aWTO Working Group on Trade and Labor.

The Administration does not believe that it is necessary to create a new chapter in the WTOAgreement to address the provisions of Article XX(b) and (g) on “health and safety” and“endangered species.” The WTO’s Appellate Body has explicitly rejected the view thatexceptions such as GATT Article XX must be interpreted narrowly. It is simply not accurate tosay that U.S. invocations of exceptions under Article XX have been rejected in the three casesmentioned.

Private Sector Involvement in Addressing Financial Crises

The U.S. Treasury supports appropriate contributions of private creditors to the financing ofFund recovery programs. Where possible, the official sector, through its conditionality, shouldsupport approaches – as in Korea and more recently in Brazil – that enable creditors to recognizetheir collective interest in maintaining positions, despite their individual interest in withdrawingfunds. However, it would be counterproductive to make a formal contribution from privatecreditors a requirement for all Fund lending. In some cases, the combination of catalytic officialfinancing and policy adjustment should allow the country to return quickly to private markets tomeet its financing needs and should depend on the specific circumstances of the crisis country.Such flexibility is essential to the Fund's ability to promote effective adjustment and to catalyzeeffective solutions to financial crises.

U.S. Department of the Treasury Response to the IFI Advisory CommissionAppendix – Page A.1

Appendix

Foreign Operations, Export Financing and Related ProgramsAppropriations Act, 1999

Section 603. Advisory Commission

(a) IN GENERAL.—The Secretary of the Treasury shall establish an International FinancialInstitution Advisory Commission (in this section referred to as the “Commission”).

(b) MEMBERSHIP.—

(1) IN GENERAL.—The Commission shall be composed of 11 members, as follows:

(A) 3 members appointed by the Speaker of the House of Representatives.

(B) 3 members appointed by the Majority Leader of the Senate.

(C) 5 members appointed jointly by the Minority Leader of the House ofRepresentatives and the Minority Leader of the Senate.

(2) TIMING OF APPOINTMENTS.—All appointments to the Commission shall be madenot later than 45 days after the date of enactment of this Act.

(3) CHAIRMAN.—The Majority Leader of the Senate, after consultation with theSpeaker of the House of Representatives and the Minority Leaders of the Houseof Representatives and the Senate, shall designate 1 of the members of theCommission to serve as Chairman of the Commission.

(c) QUALIFICATIONS.—

(1) EXPERTISE.—Members of the Commission shall be appointed from among thosewith knowledge and expertise in the workings of the international financialinstitutions (as defined in section 1701(c)(2) of the International FinancialInstitutions Act), the World Trade Organization, and the Bank for InternationalSettlements.

(2) FORMER AFFILIATION.—At least 4 members of the Commission shall beindividuals who were officers or employees of the Executive Branch beforeJanuary 20, 1992, and not more than half of such 4 members shall have servedunder Presidents from the same political party.


(d) PERIOD OF APPOINTMENT; VACANCIES.—Members shall be appointed for the life of theCommission. Any vacancy in the Commission shall be filled in the same manner as theoriginal appointment was made.

(e) DUTIES OF THE COMMISSION.—The Commission shall advise and report to the Congresson the future role and responsibilities of the international financial institutions (as definedin section 1701(c)(2) of the International Financial Institutions Act), the World TradeOrganization, and the Bank for International Settlements. In carrying out such duties, theCommission shall meet with and advise the Secretary of the Treasury or the DeputySecretary of the Treasury, and shall examine—

(1) the effect of globalization, increased trade, capital flows, and other relevantfactors on such institutions;

(2) the adequacy, efficacy, and desirability of current policies and programs at suchinstitutions as well as their suitability for respective beneficiaries of suchinstitutions;

(3) cooperation or duplication of functions and responsibilities of such institutions;and

(4) other matters the Commission deems necessary to make recommendationspursuant to subsection (g).

(f) POWERS AND PROCEDURES OF THE COMMISSION.—

(1) HEARINGS.—The Commission or, at its direction, any panel or member of theCommission may, for the purpose of carrying out the provisions of this section,hold hearings, sit and act at times and places, take testimony, receive evidence,and administer oaths to the extent that the Commission or any panel or memberconsiders advisable.

(2) INFORMATION.—The Commission may secure directly information that theCommission considers necessary to enable the Commission to carry out itsresponsibilities under this section.

(3) MEETINGS.—The Commission shall meet at the call of the Chairman.

(g) REPORT.—On the termination of the Commission, the Commission shall submit to theSecretary of the Treasury and the appropriate committees a report that containsrecommendations regarding the following matters:

(1) Changes to policy goals set forth in the Bretton Woods Agreements Act and theInternational Financial Institutions Act.

(2) Changes to the charters, organizational structures, policies and programs of theinternational financial institutions (as defined in section 1701(c)(2) of theInternational Financial Institutions Act).


(3) Additional monitoring tools, global standards, or regulations for, among otherthings, global capital flows, bankruptcy standards, accounting standards, paymentsystems, and safety and soundness principles for financial institutions.

(4) Possible mergers or abolition of the international financial institutions (as definedin section 1701(c)(2) of the International Financial Institutions Act), includingchanges to the manner in which such institutions coordinate their policy andprogram implementation and their roles and responsibilities.

(5) Any additional changes necessary to stabilize currencies, promote continued tradeliberalization, and to avoid future financial crises.

(h) TERMINATION.—The Commission shall terminate 6 months after the first meeting of theCommission, which shall be not later than 30 days after the appointment of all membersof the Commission.

(i) REPORTS BY THE EXECUTIVE BRANCH.—

(1) Within three months after receiving the report of the Commission undersubsection (g), the President of the United States through the Secretary of theTreasury shall report to the appropriate committees on the desirability andfeasibility of implementing the recommendations contained in the report.

(2) Annually, for three years after the termination of the Commission, the Presidentof the United States through the Secretary of the Treasury shall submit to theappropriate committees a report on the steps taken, if any, through relevantinternational institutions and international fora to implement suchrecommendations as are deemed feasible and desirable under paragraph (1).